AboutJim Avancena Expertise I am best qualified to answer any questions that involve commercial leases, the complexities and inter-relationships of the myriad provisions that a lease may contain, and explain how they commonly effect a landlord or tenant in their day-to-day business operation. I can explain most matters that will come up during of the full lease cycle from standard industry practices regarding the lease acquistion process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of other problems that may come up during the lease term. I have practical experience with most property management issues and resolving landlord and tenant disputes. Note that I am not an attorney and cannot provide legal advice.
Experience Twenty-eight years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area(DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.
Organizations Currently my three children keep me so busy that it is difficult to find time to participate in organizations.
Publications I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 page)feature story on January 13, 1993; "Overcharging Overhead".
Education/Credentials BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license licensed in Maryland and the District of Columbia.
Awards and Honors Routine, the same plaques and honors that most others in my industry have earned, none that are significant.
Past/Present Clients Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.
Question QUESTION: Jim,
My husband is a mental health professional currently leasing space under a master lease held by two of the individuals who have joined together for a multi-office suite. A commercial broker helped them get the space 5 years ago at the top of the market. (As a side-note, their landlord has ignored their requests all this time) Now, the same commercial broker is fast-tracking them to a new space as the lease is up this coming September. After the economic collapse of 08/09, I understand that it is highly probable, if not a done deal, that we may well see a collapse in commercial space, similar to the residential market. I am trying to get my husband to advocate the point of view that they find ways to postpone or delay a multi-year commitment, as they are likely to see an opportunity soon for a 30 percent reduction (or more) in their favor, if they slow down and seize this opportunity. They like this broker, but I am concerned that they are not considering that the broker is working in her own interest, to secure their lease quickly, and at rates that will become unfavorable to them. The other choice is my husband can leave the group and find his own space elsewhere, but he likes the people in his suite and enjoys the camaraderie. Can you give some advice on the market, brokers and thoughts in general? Thank you.
ANSWER: Mary-
Medical space seems far less likely to be impacted by the economic mess than all the other types of commercial property simply because the public must have medical services regardless of how much money is left under the mattress.
The commercial office market has not yet even started the ugly fall that will come shortly. Businesses and landlords have already seen their income falling but both still have a bit of buffer before they lose their composure and face the music. Everyone is for the most part still wearing their happy face, but the economic realities are about to come to the surface very soon. When it starts, it will be like someone turned on the spigot.
It sounds like your husband and his two cronies can lease space in commercial office buildings, or does your husband need to lease medical space? Medical property has been primarily immune to date however that could change later on.
If your husband can go into buildings that lease to a wide variety of commercial office businesses, it may not yet be the time to make your best advantage of cheap lease rates. You need to find out the hard market data on your particular office submarket. Usually you will be able to find newspaper, magazine or other on-line sources that will address the status of the office market in your area. You can find many on-line sources, and many commercial brokerage firms publish monthly or quarterly reports giving great detail about the state of the market you are interested in. You could also contact the local commercial board of realtors and ask them to give you the straight story. Don't give them your name and don't call from home or cell phone or dozens of agents will be calling you within hours asking you if you are looking for an agent.
Ask if office vacancy levels are still rising in the submarket area you are interested in. If the vacancy rate is in double digits the office market is still weak or getting very soft. If vacancies are still rising, that is not the sign that it is time to sign a lease. If your area is still having decreasing employment and layoffs are still occurring, it is unlikely that the office market is about to firm up. You can sometimes inquire with the area commercial banking association to tell you if commercial mortgage defaults are increasing or ask if commercial office building owners are showing an increase in slow-pay of their loan commitments. That would also suggest things may get worse in the office market still.
Have you husband ask his two buddies leasing the space exactly what statistics their agent has given them that compels them to lease space now. You are looking the very specific data in this answer, and NOT simply "he or she says the office market is starting to get tighter" and "we will miss out if we wait." That is not an answer.
Like residential agents, commercial brokers will tell you its is always the best time to lease a property they have discovered for you. You have got to research the specifics of many of the critical market indicators and see where the trending is headed.
Find out the vacancy rate for either "All Office Space Available" during the last 12 months in chronological order (usually it is reported quarterly) and the same vacancy rate information for "New Buildings" and/or "A Class buildings and above". What is the trend for all three sets of vacancy data? If all three report trends show increasing vacancies, it is a good bet that better rental rates are coming later.
As I said above, see if unemployment is increasing in your area; especially in the category of "Fire Services", which is office space intensive. If F.I.R.E. services companies are increasing their layoffs that is a bad sign and your husband should wait.
Before I forget, let me tell you to advise your husband and his two friends looking for a new lease. Do not get focused on a low rental rate in a new lease to the exclusion of the other terms of the lease. A five or ten year lease can have a very, very low rental rate that grabs your attention, but then it could also contain annual escalations that get that low initial rate much, much higher in just a year or two, and then you are obligated to pay the now escalated above market rent for the next three or seven years. Be careful of crafty landlords, they always know the leasing game better than you do.
Keep in mind that landlords often hide the deterioration of the commercial leasing market in an area for a long period of time by still leasing tenant/business managers office space at rental rates that nominally suggest the rental market is healthy and "you better get your new space now". However, although the high profile (high profile because cursory discussions with other tenants usually focus of the rental rate) rental rate of the lease is "normal"; that is, at a rate that makes the deal look like rental rates are not decreasing, the fine print of the same tenant's lease may hide the fact that the landlord is letting the new tenant pay only ten (10) months of rent for each of the first five (5) years of the lease term, (i.e. the tenant is getting two months of rent free each year), or the landlord is paying for all of the construction and/or remodeling/redecorating work at no extra cost to the tenant; like, linen wall covering, oriental rugs, crown molding,etc. The landlord may also be giving the new tenant a option to cancel his lease after four (4) years if he so chooses. The point is that landlords will hide the deteriorating conditions of the leasing market in the fine print of their leases to keep up the appearance of a stable leasing market.
The economic times we face now can be devastating if you make one or two bad economic decisions. Although working with those you enjoy being with is always an important concern, there are now very powerful reasons to keep your focus on your livelihood first. I believe that we have not even begun to see how much the gravity of the continuing economic deterioration will damage commercial real estate.
I believe you have the right attitude and others should be as cautious as you suggest. Unless a new lease gives you the right to cancel the terms of the lease on 90 days notice, I would be very careful of signing myself onto any deal that I have not thoroughly researched and had to move into immediately. I wish I could help you more but I would need to be knowledgeable of the real condition of the commercial office leasing market in Silicon Valley. Search for those market analytical reports put out by brokerage firms on the Internet and try to sift the wheat from the chaff.
Best of luck.
-Jim
---------- FOLLOW-UP ----------
QUESTION: Just to clarify - husband's office has 7 therapists - all independent, and two of them are the lessors, with an annual commitment by the other 5 parties. Question - when a lease is up and a build-out is required (soundproofing, etc), how many months is usually needed to bring space to occupancy? Right now (April), the broker is sketching floor plans for the build-out and occupancy in Sept. (6 months away). Is she rushing it, given the deteriorating market conditions? And - is the broker typically compensated over the entire life of the lease? How much does a well established broker earn on a lease? The landlord is offering to do the build-out as a "deal" as you outlined, which is perceived as the skill of the broker. Thanks, Jim - your answer above is way over and above what I expected.
Answer Mary-
Please allow me to comment on the thoughts as they appear in your correspondence.
If the two individuals that hold the master lease - and perhaps the next lease - have all the financial responsibility to pay the rent for the term and they do not charge your husband a premium over what they pay in rent nor require him to sign a sublease that binds your husband to a term and $$$$ for rent, that is an obvious benefit in troubled economic times. The others carry all the responsibility and your hubbie benefits with only his practice to worry about. That is worth something to your husband itself.
What requests are being ignored by the landlord? If they are serious requests regarding matters of some gravity, have them send the requests certified mail, return receipt, and save the receipt. That could be a useful defense at some time in this process. Do you know why the landlord is ignoring your mail? That practice could also be a sign that your landlord has his own plans for your husbands current space that he choose to ignore you rather than face you. Finally, does the current lease have a provision requiring the tenant giving notice they are leaving at the end of September even though the term ends at that time?
Fast-tracking is OK as long as the deal is a good one. Are either of the two tenant signators for the new lease related or anyway involved with the agent? Obviously keep up on the terms of the deal as they develop, your husband may wish to be cautious and work a parallel effort to find alternative office space if something goes wrong during the fast-tracking process. Does your husband; a mental health industry person, evaluate these two lease signators as reliable and supportive of his continued participation as a suite mate?
Silicon Valley MAY see a office market collapse, or it may only see a dip in rents, more on that below. I would say that most areas are watching their sub-markets experience rising vacancies. Office sub-markets can vary greatly from one to the next; even when in great proximity.
Postponing or delaying is a precarious game to play. If you have a skilled agent and it works for the good of your team, it's great. It can also fall through if your six to twelve month extension deal falls apart at the last minute. Be very cautious however. Sometimes the additional time doesn't deliver the benefit you anticipate, and the participants can lose some sleep.
If your office improvements are not elaborate and your local government permitting office is not going to slow down the process, you should be able to build an office; even with special sound attenuation installations (double width walls with highly rated vertical sound insulation, top rated rolls of sound insulation rolled above the ceiling tiles, thick carpeting with zero or slightly negative hardwood door clearance above the carpet, slab to slab demising perimeter walls, but EXcluding slab to slab INTERIOR office walls) in a period of six weeks with enough constuction people, pre-planning, a fast drawing architect, and tenant occupants that don't keep changing their minds about how they want the office to layout etc. There may be a bit of flex in the termination/move-out requirements depending on many things. Your problem likely will be with getting the lease deal made, put onto paper, and the document executed.
I don't know a thing about the timing of those processes in your market, but I believe you can rush the whole process if you are forced. Someone needs to check with a local attorney regarding the laws related to HOLDOVER in your legal jurisdiction, i.e., what happens to a tenant that must stay in their current office premises for a week to a few months if their new space is not ready when their lease expires. The facts of your situation and the local law will impact your husband and/or the entire group.
According to a March 23rd release, the San Jose office market had a 27.5% vacancy rate (very high vacancy!) and according to research by "Foresight Analytics" they see no DECREASE in vacancy rates in the San Jose market in 2009. It continued to say that the February 2009 unemployment rate for Silicon Valley was at 9.9%, up from 9.4% in January. It would appear that office market deterioration is being fueled for and extended period of time. Sun Microsystems is very close to being sold, and Cisco and Google are likely be making more cuts soon. Note that the announcement of cuts is not reflected into increased vacancy rates for three to nine months later.
I believe that many real estate leasing people can make a macro or micro market argument to justify whatever they want a client to do, and that is why you could hear conflicting opinions on what your strategy should be now.
Just from the limited understanding that I have of the overall San Jose area office market and the recent unemployment statistics, I believe the rental rates may still increase in your area. Understand that at some point a building owner or lender cannot reduce the rental terms any further because it actually dilutes the sale value of the property if they are forced to sell. You may find that the owners in your market can only go so much lower with their rental rates.
I cannot predict what will happen in your office market between now and next year, but information can help you make an informed plan. I wish I could be of more assistance.
You are a good writer and describe the processes with which your husband is involved well. Good luck.
