The stock market is reaching highs not seen in over a year, federal stimulus funds are flowing and Goldman Sachs just issued the first CMBS deal in over nine months -- so is the economy and, consequently, the commercial real estate market truly on the rebound?
"Landlords would have you think so," according to Matt Ellis of CB Richard Ellis (NYSE:CBG). "But the reality is that the commercial real estate market lags other economics indicators."
Consider that after the residential housing bust in May 2007 that ignited the recession, the commercial real estate market didn't start declining for over a year, Ellis said.
"So suppose for a moment that the market truly is coming back and a survey of economists shows there is a lot of concern that this recovery could be both weak and temporary, then we can expect the commercial real estate market to take a year or more to feel the effects of any recovery as money flows back into firms, they expand their operations, employ more people and, finally, lease more space," Ellis said.
Markets that cater to smaller, less mature firms (B markets) like Poway are the last markets to feel the benefits of an economic rebound.
"So what we have, particularly in these B markets, is a window of opportunity for businesses to make strategic moves to lower real estate costs and position themselves for the rebound," Ellis said.
Brian Klepacki, also of CB Richard Ellis, advises his clients that now is the time to create a strategic lease. "Tenants are in a position to leverage the opportunities in the market and secure concessions from their landlords like fixed rate options, termination rights and free rent."
Ellis and Klepacki both exclusively represent tenants in the leasing and purchase of commercial real estate. They recently completed a deal in Poway for Environmental Control Systems where the tenant still had more than a year and a half on its lease. Despite the term conditions, Ellis and Klepacki were able to bring the property's landlord to the table and achieve a reduction in lease rate, a significant tenant improvement allowance, free rent and a right to terminate the lease early.
"We went from a boiler plate offer by the landlord to renew our client early at the same lease rate, to hundreds of thousands of dollars of concessions," Ellis said. "This was a win-win for the landlord and the tenant, as the landlord prevented vacancy and we positioned our client for better economics and flexibility going forward."
Serving clients including Johnson Consulting Engineers, HydroScientific West and SpitzLift, Ellis and Klepacki have completed more than 35,000 square feet of lease transactions in Poway since September.
"There are opportunities for any company willing to take the time to look at its lease and assess the market, no matter when the company's lease expires," Klepacki said.
Thornburgh is a communications specialist with CB Richard Ellis.