Office tenants in control for years to come

Not many businesses can claim to be in the driver’s seat in this economy. But you’d have to search far and wide to find any in more command of the situation than the firms representing large office tenants at a time when landlords are scrambling to pay their bank notes.

Michael Colacino

Michael Colacino

“We’re in a position of control like never before,” Michael Colacino, president of Studley, said. “The landlord is [supposed to be] the lord of the land and the tenant is the ant. It’s been inverted now.”

I sat down with Colacino and Clark Dean, a senior exec at Studley, to discuss the crisis in commercial real estate. Studley represents large occupants of buildings in lease negotiations with landlords. Colacino is based in New York, where Studley is headquartered. Dean is based in Atlanta, where he helps lead Studley’s national corporate services group.

They were able to give me a crash course about what’s in store over the next few years. It’s not a pretty picture for the owners and lenders. It’s very pretty for large, credit-worthy tenants and their reps.

Here’s how Colacino and Dean see things unfolding:

– Until recently, a lot of leasing activity had been frozen by the fallout from the financial crisis. But over the next 18 months or so, there are going to be a lot more deals negotiated, as owners lose their buildings or restructure their debt. Building values will continue to fall, causing more foreclosures. Sometimes, lenders will decide to write off part of the debt instead of foreclosing on owners.

– At the same time, tenants will be able to drive very hard bargains, often pitting one building owner against another. Some tenants will be able to renegotiate their leases at more favorable rates. Landlords will need long-term deals with good tenants to secure financing.

Clark Dean

Clark Dean

“Conventional wisdom asserts that real estate is all about location, location, location,” Dean said. “But commercial real estate is really all about cash flow, cash flow, cash flow. Without it, the value of the most extraordinary glass and stone edifice approaches zero.”

– Landlords who buy buildings in foreclosure can benefit from the depressed prices that give them flexibility to attract tenants with sweeter deals.

– The days when trophy office buildings are built on spec are over — forever. No tenant, no loan. End of story.

– During this recession, many CEOs have changed their thinking about office buildings. They have had to cut costs, primarily by laying off employees, who represent their biggest expense. Now, they’re turning their attention to real estate, often the second largest expense.

“For the CEO, commercial real estate went from being a distraction to an obsession,” Colacino said. Cutting real estate costs has become part of many CEOs’ long-term strategy.

– Finally, the scariest news might lie ahead — a “paper apocalypse” that could turn into a real one, Colacino said.

Starting in 2012, a wave of interest-only loans will come due on many office buildings, meaning owners will have to get new financing to stay in the game. But building values have fallen considerably since the loans were negotiated a few years ago. And loan requirements have stiffened. There’s a big increase in the equity an owner needs to get a loan.

“This is an age of extremes,” Dean said. “There will be big winners and losers.”

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5 comments Add your comment

TnGelding

August 17th, 2010
10:50 am

Well, I guess I wrote the magic word. Suffice to say office space should be functional. Grand structures like the WTC attract extremists. We can’t afford that kind of excess any more, and probably never could.

Why can’t the “winners” in the housing market collapse help more in cleaning up their mess?

TnGelding

August 17th, 2010
10:30 pm

Forever is a long, long time. Don’t bet on it.

A.S.Mathew

August 18th, 2010
10:40 pm

As the events are shaping up every day, everything is going upside down. So “forever” may be
defined as a pratical reality.

Lower Rent

August 20th, 2010
10:39 am

I asked my landlord for a rent reduction on the office condo we are using. He said no, so I found another, better office 3 blocks away for 50% less rent per month!!! Some refuse to acknowledge reality.

Boycott BP

August 21st, 2010
6:31 pm

Many landlords are “the bloodsuckers of our economy.” Strictly talking about the big boys like my landlord, DDR, Developers Diversified. I am in a retail shopping center of theirs’ with a kick out clause that I intend to execute at the end of this year. These guys suck the living blood out of us. Certainly could have gone Chapter 11 but I am tied into the lease. Thank myself for the kickout clause… Encourage all potential tenants to include a kickout if things don’t go as hoped. It’s sad that companies like DDR don’t believe in win win. These guys are a public company but someone should truly examine them. Being one of their tenants and knowing how many times they have tried to overcharge me for small things like water consumption, I can only imagine how they can generate millions by fudging every tenant a nickel and a dime and then multiplying it by the thousands of tenants who will never even challenge it. I challenged it when they started to invoice me double from the previous year on water. Nothing changed with my tenancy, and when I called the local city water supplier and asked how rates changed, guess what, there was no increase by the city water supplier, but DDR had the hutzpha to charge me double. When challenged by me they backed off. I wonder if the big tenants really look that closely? DDR tried to cheat me. Watch these guys…