Archive for July 2009

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How to Handle Tenants That Want to Renegotiate Their Leases

You may have heard about tenants contacting landlords to ask for rent reductions and concessions to help them stay in business.  Read more.  Recently, two clients called us when they received a letter from their tenant's real estate broker giving notice that they were seeking to renegotiate their leases because of a decline in sales.  50 letters were sent, and they warned that if they didn't agree to lower the rent, they wouldn't renew and would close the operations.

This was a big problem.  Our clients depend on these assets and were upset that they could lose the tenant and consequently, their income stream.  To boot, they were angry because they said they hadn't gone to their tenant in good times when sales were up. What to do? Ideally, the owners wanted to keep the tenant for as long as possible to maintain their cash flow.  The problem was, the tenant was looking for an 18% reduction in rent and was only willing to sign for 3 additional years.  Not a great deal.  In fact, they even considered telling the tenant to vacate and then lease the properties to other users because they were so insulted by their initial offer, but after seeing our analysis of the financial impact of actually locating a new tenant, they decided to respond to the tenant's offer. The trick, however, was figuring out what was happening with those 50 owners that received letters. We called all of the other owners to see whether they received a letter as well as assemble a group of owners to share information of the tenant and their leases.  (By the way, most corporate tenants--Hewlett-Packard among many--keep a negotiation database of all leases they sign so they know which landlords grant certain concessions, where rents should be, as well as to prevent themselves from granting concessions that could haunt them later.  We sought to do the same on the landlord side.) What we learned was that 9 letters had been received.  Further, based on comparable data collected, our clients were among the most expensive locations for this tenant, which seemed to be the real reason why the tenant had approached them. The tenant wanted immediate cash flow benefits and our clients wanted commitment without much disruption to their income.  We advised they ask the tenant to sign for 15 more years in all locations and in exchange grant them a rent concession over the term of approximately 7%.  The tenant responded and said the longest lease they would entertain would be for 10 years.  We accepted the length and went to work on the rate. After several back and forth discussions and financial profiling of the lease proposals, we settled the tenant into new, 10 year leases with 9% rent concessions over the entire term.  To boot, their rent was staggered to allow our clients the ability to answer the tenant's short-term need for rent relief while still maintaining the cash flow they depend on. In this case, seeing through the market to other owners and understanding the implications of decisions over rent concessions and term requests paid off for everyone involved.  The tenant kept their operations open. The owners maintained their cash flow and secured new lease commitments in a tough market. Need help renegotiating with your tenants? If so, email me at Jeremy@Mansardcre.com with the words "My tenants want new deals" in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will contact you to schedule a time for you to invite me to your office for a free consultation.  If there's a fit, you may retain us to work on your behalf to stabilize and renew your tenant relationships.  If there isn't a fit, we'll tell you we cannot help and will refer you to another firm that may be a better match. Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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Why an Architect Can Be a Great Investment - Boston Commercial Real Estate

Space is a pretty simple business.  Or is it?  If you think about it, one person owns a box, another person needs to use it.  The two get together, agree on a price, terms, and conditions. The keys are handed over and the box is occupied.  The tenant makes money in it and the owner makes money from it.  Pretty simple. What do we need architects for if it's that easy? Sometimes not everyone agrees on the size, look, feel, use, or ability of the box to deliver the value that's perceived by the owner or tenant.  This is where our architect comes in handy for the following items. Measure your space .  In our estimation, 2 in 5 building owners don't have plans for their buildings, don't know  their common area factors, which spaces are truly rentable vs. usable vs. vertical penetrations, and are undercharging for the space they're unknowingly leasing to their tenants. Now, about that lobby ...if it hasn't been updated in a while, take a good, hard look at it.  This is one of the best investments you can make in your office building to frame the tenant's experience when touring the property as well as provide your tenants with an immediate benefit that makes them feel that all that rent they pay is worthwhile. They're thinking, "At least we're getting something for all that rent we pay." A great architect can help you see these improvements and save you a lot of money in the process.  Small investments in your common areas can pay big dividends in decreased vacancy, higher rents, and higher NOI's, forcing appreciation into your asset. Brand your building .  Give it a name and a distinct identity. Everyone else has an address: what's the difference between 111 Huntington Avenue in Boston and 200 Clarendon Street in Boston? How about the difference the Prudential and Hancock Towers in Boston? Can you picture them in your mind?  (Did you notice that the address for these buildings was in the first question?) Give your buildings a signature look to go along with a name. Sometimes it's simply a matter of updating the facade or entryway to make it distinctive and memorable. Take a lesson from Coca~Cola. Repackage your space.  How much do you pay for a case of Coke vs a single can.  Get the most from your space. Go Green. It's a fact that LEED and Energy Star certified buildings lease for more money.  Some architects can bring in an energy conservation and building envelope specialist to point out ways to save energy and help you cut down on waste, which also means reducing operating expenses and increasing your net operating income. If you're looking for someone to help implement any or all of these tips, here's the name and number of an architect firm we use and recommend: Call Leslie Saul & Associates (617 234-5300) and tell them you need the works because you heard they work miracles. (By the way, we have no financial interest in making the recommendation. We just really like working with them and think they're excellent.) Get free weekly email updates of this blog. About the Author :Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com .

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Why Understanding Demand is Critical to Success in Commercial Real Estate Investing

A few weeks ago I had the privilege of teaching with one the CCIM Institute's most experienced and knowledgeable instructors.  He has spent a career mastering one of the most important, and often overlooked, components of commercial real estate analysis: identifying and quantifying demand.

He says that demand for space is 80% of the real estate decision and that financial analysis is the other 20%.  Too often, according to my colleague, investors and users focus on the 20% without really digging into what drives the numbers, who's going to be using the space, and why the proposed use makes sense.

Here's an example of why this is so important--overbuilding.  How many developers have you seen in the past 3-4 years losing gobs of money in real estate because of a shift in demand? And do you think the numbers they used are worth anything today? Here's why it matters. Essentially, jobs drive demand for office and industrial space.  As jobs are created, households are created, people get married, have kids and need housing and retail services.  They consequently create a demand for retail space and homes.

So what happens when the jobs go away, as in Massachusetts, which is currently reporting an unemployment rate of 8.6%? Demand for office space and industrial space declines,  creating more vacancies, which leads to a decline in demand for retail space and housing--i.e. a report out this week that multi-family vacancy rates nationwide have it a 22 year high.

The question is, when will the "death spiral" end?  (See Seth Godin's blog). The Death Spiral ends when businesses start reinvesting and hiring.  This is what I tell those who ask me when I think the housing market will recover.  Once the job losses stop and people start feeling more secure about their incomes, they'll start buying lattes and homes again.  Then as companies  ramp up to meet increased demand for their products and services, they'll soak up additional space at lower rates, hire more employees, and we'll see an uptick in consumer spending that will follow the initial consumption uptick of those with job security. My concern, however, is that our government will increase taxes and raise interest rates to pay for their meddling in our private industry, which would forestall the recovery and expansion as well as keep us in a protracted and skittish recovery for years to come.  What do you think? Would you like a demand analysis performed for your properties? If so, email me at Jeremy@Mansardcre.com with the words "How much demand is out there for my property?" in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will contact you to schedule a time for you to invite me to your office for a free consultation.  If there's a fit, you may retain us to conduct a demand analysis of your properties, their position in your market area, and identification of the top users with contact names and phone numbers to help you gain transparency into your tenant market.  If there isn't a fit, we'll tell you we cannot help and will refer you to another firm that may be a better match. Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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What Happens to Market Demand When Life Catches Up?

Jack liked to smoke.  Often.  He'd hang out smoking just at the entrance to the office and would greet me with a casual smile and the seasoned look of a battle hardened real estate broker.  On normal days, I'd stop, stay hello and then go to my desk.

After the World Trade Center attack in 2001, the world seemed to come to a stop.  Everyone stopped and waited to see what was going to happen to the market and overall economy, and seemed equally unwilling to take any risks and get back making money work.  People were just proving that the market responds worse to uncertainty that it does bad news. On a fall day in October, 2001, I pulled into the parking lot and saw Jack smoking on his stoop.  I said hello, stopped, and asked what he thought of everything going on and whether the market would pick back up.  He paused, smirked, and exhaled answering, "Of course.  That's what I love about real estate.  Someone's always getting married, divorced, having a baby, getting hired, laid off, or just ready to retire." Basically, the world may stop, but time and life don't.  Eventually they catch up and give people a  kick in the butt to keep moving. In the  Greater Boston and New England market, the first 6 months felt a lot like the month or two after 9/11.  We're now beginning to see the early stages of activity, which feel a lot like pent up demand to us.  Tenant requirements have been flooding in with immediate occupancy requirements; investors coming back to the market looking to generate higher returns than their ING accounts will pay; and sellers going out of business needing to sell fast and hoping to walk with some cash. What are you seeing?  Anything shaking loose? Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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Why We Invest in Commercial Real Estate When Times Are Tough

I have to confess that maybe I’ve been a bit negative in recent entries.  Maybe it’s because of all of the news out there that times are terrible and that it’s not going to get any better. My business former business partner and I tended to joke about it.  He’s a bear and I’m a bull.  Deep down, I’m an optimist and believe that we’re entering a window of opportunity over the next 24 months that are going to be a tremendous time for acquiring assets.  I also believe that we live in a dynamic, creative, and innovative country whose people have the ability to face down challenges and grow through them. So, sure. Times are tough.  But money’s still being made. And the world still goes around. So maybe I haven’t been too negative, just realistic.  The way I see it is that you ought to hear it for how it is.  If this information helps you make, or even save, money, then kudos.  You’re making it work. It’s not all bad, though. There is money being made out there and it’s going to continue being made.  In fact the ones who are doing it, seem to be living by a credo that I once heard. “Buy when times are tough or when it’s just hard for you to buy.  Sell when it’s easy.” Do you think you are a seller today? If so, email me at Jeremy@Mansardcre.com with the words “Sell my building in today’s market” in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will  contact you to schedule a time for you to invite me to your building for a free consultation.  If there’s a fit, you may retain us to sell your property.  If there isn’t a fit, we’ll tell you we cannot help and will refer you to another firm that may be a better match. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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How to Know When to Change Your Approach to Investing

In my prior life as a history student, my doctoral advisor explained his perspective of human behavior and how historians better understand why people do the things they do.  He believed that as people encountered adversity, and as the outcomes of their efforts didn’t equate to their intentions, they would intensify their efforts in the hopes of overcoming undesirable results in return for what they actually wanted to happen. It wasn’t until their intensity of effort was no longer sustainable that they would throw their hands in the air, quit, overthrow their leaders, question their assumptions, kill their idols,  die, innovate, change, etc.  Epictetus, the stoic Greek philosopher said it in other words, “What concerns me is not the way things are, but rather the way people think they are.” With the increasing intensity of what’s been coming out of New York and Washington DC, and how we believe we understand what’s “really” happening with our economy, are we really solving any problems? Or are we just turning up the volume to see if something changes because of the way we see it? We’re living through an extraordinary time--a paradigm shift in our economy and country’s position in the world.  It’s also a period when generational wealth will be made and lost.  And I believe great fortune will favor those who move sideways, do the unexpected, and are first to innovate to solve the problems we face in new and alternative fashions. Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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What Does Pele Know About Commercial Real Estate?

Fans used to ask Pele, the great Brazilian soccer player, how he achieved such mastery of soccer.  He used to answer,"Everything is practice." Pele understood that the path to greatness wasn’t spending hours perfecting the most complicated plays of the game, rather endlessly trying to master the fundamentals.  Mastery of the fundamentals, his most difficult endeavor, catapulted him to soccer stardom. Pele teaches us that when we’re looking for increasingly complex solutions in a market of disarray, through mastery of investment analysis fundamentals, we gain the ability to see through the chaos to what really matters: understanding risk, return, and making well-informed, profitable investment decisions. Learn about applying the discount cash flow model to price commercial real estate investments, which allows us to value deals with multiple variables in a clear, coherent, and informed manner.    Once you master its application, you’ll find yourself taking stock of tenant risk, interruptions in cash flows through these uncertain times, pinpointing exit assumptions, and making adjustments today to create investments that meet your acquisition criteria. I learned my basics through the CCIM Institute. If you're interested in taking a CCIM course, email me Jeremy@Mansardcre.com and tell me your name, the course you'd like to take, when, and list the questions you have about what to expect.  I'll respond to your email within 24 hours of reading it with insights into the CCIM designation and what to expect when you enroll in your next session. About the Author :Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com .

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How to Think Like Smart Money

We live in a time of turbulence.  We hold on as old systems are tested and pushed to the hilt.  Look at how government spending supports and maintains these systems for as long as possible before allowing them to break -- case in point, GM’s bankruptcy. But what happens when these systems shatter?  We pick up the pieces and rearrange them to create new modes of operating amidst a new landscape.  We develop a new equilibrium, don’t we?

Here are a few applications I’ve seen recently:

• Combine a demolition crew with a functionally obsolete 
 warehouse building to bulldoze portions of the building to create 2 -3 functional industrial properties.

• Make tenants your lenders.  Ask them to finance your 
 development and also be the anchor.

• Unpack the words “Toxic” and “Asset”.  They’re really just liabilities.  Turn 
 trash into cash by repackaging, repricing, uncovering underlying value, and 
generating return on investment by aligning the new asset with market 
demand.

Ask yourself, if it’s true that, according to he philosopher Heraclitus, “A wonderful harmony is created when we join together the seemingly unconnected,” then what pieces could you assemble to create new opportunities that will make you money and provide value to your community? About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.