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 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.
