Commercial Tenants Need to “Roel” with this Tight Market

Ron Roel, a former Newsday editor and a co-founder of the real estate educational service Real Estate Next, has written a white paper called “Real Estate and the Media: Understanding news coverage and its impact on the housing market.” While the paper examines the issue of whether the media unduly focuses on negative real estate stories in the residential real estate markets, it also raises the important question of how the media shape public opinion about the commercial real estate markets.

The Commercial Analogy

Roel describes the recent increases in stories about a housing “bubble” being ready to burst. The media equivalent in commercial real estate would be the increase in coverage of the unrelenting rise in the prices of commercial office space in Manhattan. Before opining on this coverage, let’s examine some of the underlying facts:

• Average prices in Midtown and Downtown are at all-time highs;
• Vacancy rates are at recent historical lows;
• Vacancy rates are below the consensus rates of “equilbrium”;
• The majority of real estate pricing is subject to supply and demand curves;
• Real estate pricing, like the economy itself, is cyclical and subject to both upturns and downturns;
• Commercial property owners are major advertisers in the local media;
• Real estate brokers are paid higher commissions commensurate with higher rents and longer lease terms;
• Most real estate brokers at any given time are representing the interests of a property owner.

What does this mean for the commercial tenant today?

1. If you face an upcoming lease expiration, think long-term. Consider renewing on a short-term basis until this market cools down. We often recommend a short-term renewal in order to allow time to execute a process that leverages the market. If you’re out of space and need to relocate, sign a short-term relocation lease.
2. The recent rise in prices has been fueled primarily by a lack of supply. For Downtown tenants, this will change as new construction breaks ground at World Trade Center. For tenants in Midtown, the peripheral boundaries have expanded in all directions. Tenants must now evaluate the west side, Midtown South and Northern Manhattan (Harlem).
3. Many companies are currently “inventorying” excess space. If and when the economy falters, this inventory will initially become “hidden” or “shadow” space and ultimately, sublease space. Currently, corporate “belts” are cinched at the loosest notch.
4. Don’t believe everything you read. Media coverage of the market is inherently biased. Examine the individuals quoted in the media. Understand which firms they work for. Ask yourself if those firms represent major property owners (and if in doubt, turn the page and look for their advertisements). Ask also if these professionals are incentivized to promote a market frenzy.
5. Commercial real estate is not like residential. Leasing office space is not like buying a home. There are no “hot” properties. There is only new construction and old construction. Companies do not select locations because of the property marketing, they select based on a matrix of criteria, including cost, commutation, amenities, efficiencies, etc. (i.e. Long Island City is still located in Queens).
6. Higher a trusted advisor. Understand how your advisor is compensated. Understand who your advisor’s other clients are and if any of those clients represents a potential conflict of interest.

In summary, navigating today’s commercial real estate market is fraught with greater peril than ever. The risk is in “locking in” a long-term rental rate that will leave you underwater in a market downturn. Take a deep breath, turn the page of that publication and let sounder reasoning take its course. There are many more options to discover from which to benefit.

This entry was posted on May 22, 2007 at 5:43 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.