Tenants today tend to be well informed. They read journals, market reports and newspaper articles. Though they may only be in the lease market every few years, they know what’s going on most all the time. They know many commercial real estate markets across the country are hurting. So, when they are looking for new space, they have certain expectations. They are in disbelief when Landlords and owners seem to defy the market. They can’t understand when certain owners seem to be in denial or out-of-touch with what the news reports tell them.
Are the Landlords just being obstinate, arrogant or in some state of hallucination? Are they crazy? They are probably none of these. Rather, they likely are hamstrung by loan covenants, equity partner requirements, and tight credit. While they may appear entrepreneurial, many owners are constrained by partners exercising close oversight and control. The deal makers of the past appear like stoic institutions today. Their partners (or lenders) are autocratic; they only think about protecting their money, or what they have left. Rather than accept a lease deal at rates below their proforma (but in line with market), they hold their ground, struggling to defend their pricing. The theory is “Wait for a better day” – “Wait for the market to recover.”
While frustrating for Tenants, this phenomenon will continue for the foreseeable future. Opions vary, but the smart money predicts the economy, and therefore commercial real estate, will struggle for the next 5-7 years. Shakeouts will occur. Some properties will go through foreclosure, deed-in-lieu of foreclosure, fire sale or bankruptcy. New owners, with a lower cost basis, may be able to adjust lease pricing to be more in line with market. Still, there are no guarantees how long this process will take or which properties will go through the metamorphosis.
The good news is that not all owners or Landlords are affected. Tenants are well-advised to competitively bid their requirement. This process will quickly reveal who can deal and who can’t. If you are a Tenant, good luck and happy hunting!