Posted by: BayAreaComRE | August 26, 2010

Leasing Reigns: When it is second fiddle, bad things happen

This post is taken from the new blog CRE Genius. Justin also writes for the new national commercial real estate blog CRE Genius (from the people who created Agent Genius). We provided excerpts from the article, and to read it in full, follow the link at the end of the story.

At the core of commercial real estate, the over-arching constant is leasing. Any income generating property needs to attract tenants, and every investment opportunity should be based on the marketability of a building to tenants. In this market, if you’re a landlord and you don’t make a deal, someone else will with that tenant.

Most major metropolitan cities house diverse companies across many industries, ranging from traditional banking and law to advertising and technology. Secondary and tertiary markets become more focused on fewer tenant bases, but the principles remain the same. Position buildings to attract the tenant base in your market.

Granted, better capitalized owners reign superior in tough economic times as they can finance tenant improvements and maintain their properties. Any owner who mis-calculates their tenant base, overpays for their property or allows their spaces to become mundane, “zombie” space will most likely fail. We are seeing it constantly.

The recession was the epitome of this trend

The inescapable part of a recession is the appearance of divergence from making decisions based on leasing. The Great Recession was the epitome of this trend. The majority of media coverage on the commercial real estate market is the buying and selling of buildings, foreclosures or prodigious purchases. It seems during the boom times, people start thinking less (about leasing), and more about (emotion). Now that the leverage has shifted, landlords have to readjust and reexamine their buildings’ identity and tenant appeal.

Seems simple, right? You hear all the time, commercial real estate isn’t brain surgery. In 2005-2007, this trend, investing on emotion and not leasing, was rampant. Just last year, Morgan Stanley relinquished control, “gave back the keys”, of a portion of the Glenborough portfolio, which was sold to Morgan Stanley as ”the largest real estate transaction in San Francisco history” in 2007, according to the SF Business Times. This happened everywhere. The price of the sale was supported by top of the market prices or even inflated rental rates from the peak. Leasing was not the driver of the decision makers at Morgan Stanley and their Glenborough portfolio.

 The market is unforgiving in the long run, and this downturn exploited these missteps.

A better way to address this issue

I believe there is a more sophisticated process to deal with commercial real estate foreclosures, notably the capitalstack that dictates the transference of ownership, so I do not expect a double dip recession led by the CRE industry. But then again, the cre market did not spark this last recession, so some of it is out of our control.

At a recent conference in Chicago with all the major CRE players from around the country, The Annual Marshall Bennett Conference, the main theme was doing more with what you have. That means focusing on leasing, i.e. improving lobbies, amenities, tenant improvements, etc.

When leasing is ignored, owners lose buildings. The leasing industry reveals the quality and marketability of assets more when the market is in the throes, because as the demand thins out, space becomes abundant (17.8% gross vacancy in the US). Tenants have more options, and the CRE business cycle perpetuates.

The leasing cycle in play

First there is the flight to quality. In San Francisco, that means space with views of the Bay and bridges are highest priced, expansive city scape views come next, and so on and so forth. Location is always a factor, but in a dense city, there can be myriad properties in a small radius. The most recognizable street in San Francisco, California Street, you can be in arguably the best building west of the Mississippi, 555 California, for $50/sf. Location doesn’t always tell the full story, as a block down 555 California you can be in a building for half the price, but the views are poor, the building is in poor condition and, not surprisingly, vacancy is high.

The article went on to say…

This recession hit everyone

Everyone over extended during the boom times. Now we have lost 8.4 millions jobs. Ken Rosen thinks we will get only half of these jobs back by the end of 2012. We are expecting a flat, drawn out recovery, absent a double dip recession, due to the slow job growth and massive ground to make up. This means tenants will be the ones in the drivers seat.

Landlords with degrading, un-maintained assets will flounder, while the well-positioned properties will see activity. Invest smart based on leasing, and you can succeed; ignore leasing and invest on emotion and you will probably fail. Leasing is everything, especially in this economic environment, and the CRE leaders recognize this and are acting on it.

To Read the Full Article, please visit the brand new national commercial real estate blog, CRE Genius ( Leasing reigns: when it is second fiddle, bad things happen.


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