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.
“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.
“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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