Real estate executives offer tips on how to get the best deal on space in 2013
- November 29, 2012
Now that the presidential election is over, some real estate executives expect companies to begin making more decisions on space. “If the economy gets more zip, projects will move off the shelf,” predicts Al Lingerfelt, a principal with the Lingerfelt Cos., a real estate developer in Richmond.
Others look for pent-up demand to spark a more active market. Since the Great Recession of 2007-09, many companies postponed real estate decisions, because they were wary about the economy. Some stayed put, and others opted for short-term leases.
Steve Ranck, managing director for the Tysons Corner office of Jones Lang LaSalle, says his office expects to do the same number of transactions in 2012 as in 2011 ― 850 to 1,000 deals ― but revenue will be down. “Instead of people writing five- to seven-year leases, they’re doing two- and three-year leases. Everyone has been saying, ‘I want to put a Band-Aid on it and come back in 2013 or 2014, when I’m a little more sure what the economy will do before I make a real estate commitment.’”
If 2013 is the year your company decides to jump back in the market, here’s advice from the experts on how to get the best deal.
Tip No. 1:
Real estate isn’t simple.
There are many details to consider as tenants face an expiring lease, begin searching for a new home, consider buying vs. leasing or stay in their current location.
Tip No. 2:
Evaluate existing space.
A major trend these days is the efficient use of space. John Vivadelli, CEO of Agilquest in Richmond, works with companies to maximize their space and likes to throw out these eye-opening statistics. “The average actual use of commercial office space between the hours of 8 to 5 is between 30 and 50 percent.” Also, he says a study by Jones Lang LaSalle found that only 75 percent of the space leased by a company is actually assigned to anyone. “So, there’s a 25 percent vacancy in the portfolio.” The bottom line, he says, is that many companies have the space they need. “They just need to manage it and occupy it in a more efficient manner.”
In the age of mobile technology, the idea that every employee needs an assigned desk is falling by the wayside. Younger workers, says Vivadelli, are comfortable working from anywhere. “From home, from Starbucks. They don’t have to go into a building to get the work done.”
The potential for savings, including reduced energy consumption, is driving companies to assess space. Typically, it costs about $15,000 a year to have a workspace under the old, one-employee-per-desk pattern, says Vivadelli. Geography does matter. In Richmond ― a second-tier market ― the cost is probably closer to $10,000 per year.
The federal government, always a big factor in Northern Virginia’s commercial real estate mix, is moving toward reduced office space. Vivadelli says his company is working with the U.S. General Services Administration on a plan to consolidate five buildings into one that will house 4,500 people at 2,000 workspaces.
When the plan goes live next spring, he says, employees will use Agilquest’s software to reserve a place to go to work. “Then when they leave, that desk becomes available for someone else to use. Our system books it and measures how much space is being used.” Cutting 2,500 workstations at a cost of $15,000 per year represents a saving of $37.5 million a year, or $375 million over the life of a 10-year-lease, Vivadelli says.
While not every company can be flexible in its use of office space, real estate companies are taking a closer look at occupancy planning. Ranck says JLL hired someone in its D.C. office specifically for that purpose. “In the mid-Atlantic region, we take her to almost all of our major clients, and she will do an occupancy study for them. It’s not just desk time; it’s maximizing the use of conference rooms, the technology footprint.”
Dennis Cronk, president and CEO of Poe & Cronk real estate group in Roanoke, says technology is playing a major role in office downsizing for service firms. “Law firms aren’t taking as much space, because they don’t have the support staff they used to have. Over the last five years, lawyers have leased 25 percent less space. Everyone is mindful of making their space as efficient as possible,” Cronk adds, “because you pay by the square foot.”
Tip No. 3:
On lease renewals, seek more term.
If a company decides to stay put, it should negotiate a better deal from the landlord. “We’re seeing lots of renewals and lots of blend and extend,” says Steve Gentil, a partner at Colliers International in Richmond. “That means the landlord gets more term and the tenant gets a more favorable rental rate.” For example, Gentil says, say a tenant has two years left on a lease at a rate of $24 per square foot. “I go to the landlord and say, ‘Drop the rent to $20 for the last two years of the term, and I’ll give you another three years at the $20.’”
Many landlords will agree, Gentil says, because it’s a good deal for them, too. Retaining tenants avoids the risk of vacancy and build-out costs for a new tenant.
J.C. Wynkoop, a retail and development broker for S.L. Nusbaum Realty Co. in Norfolk, did a recent deal in Virginia Beach for a restaurant that stayed in the same shopping center but moved to a new location, doubling its space from 3,500 to nearly 7,000 square feet. The tenant, a hibachi restaurant, needed more space for tables. It was in year five of a 10-year lease. The restaurant agreed to a new 10-year lease, and the landlord let the owner move into a larger space with no penalty for getting out of the earlier lease, Wynkoop says.
Plus, the landlord invested in a tenant build-out that added waterfalls with koi ponds and a different look that inspired the restaurant to go with a new name: Super Ninja. “The landlord had a larger space that was vacant, so it made sense. If you already have a vacancy, you want to keep the tenant. That’s the name of the game. It’s more expensive to do a new deal,” says Wynkoop.
Rent vs. build-to-suit.
Building a new project from scratch can be twice as expensive as leasing an existing building. Some companies with specific needs, such as medical facilities, have to go with new construction. However, barring a specific need, the best deals out there are with existing inventory.
Tip No. 5:
Buying vs. leasing.
“There’s no better time to be an owner occupant,” says Gentil. “If you’re a going concern with a great track record at the bank, and you’ve been paying rent for a long time, you can buy your building.”
Jodie Strum, an associate at John B. Levy Co., a real estate investment bank in Richmond, says there’s plenty of financing available for commercial transactions at interest rates in the 4 percent range. “If you are looking for acquisition money, it’s definitely out there … the bank isn’t the only recourse. There’s the CMBS [commercial mortgage-backed securities] market, insurance companies and pension funds.”
Tip No. 6:
Financial vs. nonfinancial terms.
A transaction isn’t only dollars and cents. Tenants should hire a professional broker to avoid pitfalls. “It’s not just rent and a tenant improvement allowance,” says Gentil. “How strong is the landlord and what is his reputation?
A good broker will know the nuances of the market. He or she will know of space that might be coming on the market and will be able to advise clients on current trends. For instance, with retail tenants, landlords probably will demand more information upfront. “From 2007 until now, we saw an extended free rental period, or a higher tenant build-out allowance … For the most part, those days are over,” says Brett McNamee, a senior vice president for Divaris Real Estate Inc. in Richmond. “The tenant has to produce a solid business plan and expectations for his projections for business, profitability and some financing.”
Tip No. 7:
When contemplating a change, companies should plan ahead. Cronk advises three to six months if a company is looking for a new lease or wants to expand. Contiguous office space can be especially hard to find in tight markets. “If buying, look six months to a year out.”
In regard to timing, Gentil offers this market secret: “The best places in the best location with the best landlords get leased first.”