Real Estate

6 Steps To Using The Commercial Real Estate Bubble To Your Advantage

I’ve been working on a novel for longer than I care to admit. Having finished it some time ago, I have finally started the re-write.

Every writer has a process that is natural to them. Mine, I have leaned, requires I first place the location of each chapter before my characters start to do anything. I read somewhere that character + location = plot. That is certainly true in my case. And a vivid location gives context and purpose to the people that come alive in my book.

The same applies in the real world. Finding an office space that supports and enhances the purpose of your business has a lot to do with the quality and originality of the work the company produces.

Commercial real estate is forecast to be the next great bubble to burst in the economy. Unlike residential loans, commercial real estate typically operates under five to seven year terms. The downward pressure on landlords through defaulting tenants and shrinking demand for office space reduces income to real estate owners, just as many mortgages are coming due for renegotiation.

The consequence puts renters in good standing in powerful positions to negotiate more favorable terms. Lengthening the term of a commitment in exchange for lower rent and space improvements for instance creates both an economic and emotional win at a time when either are hard to come by.

If you rent from a landlord who owns multiple properties, and almost all of them do, exploring their other buildings, even if you still have two or more years to run under your current lease may create a win-win.

If you have less than two years left on your current lease, have your broker analyze every building in your target area.

In either case, here is a six step plan for improving your real estate situation:

  1. Define the five best and five worst aspects of your current space situation. This should include things like expansion rights, sound, light and temperature quality, and convenience to transportation and restaurants. Issues that affect your staff’s daily experience and your company’s future growth.

  2. Ask a real estate broker to give you a list of the other buildings your current landlord owns together with current occupancy rates and most recent deals

  3. Ask your broker to analyze each building against your list of best and worst features - color code each improved feature as green, each equivalent feature as orange, each lesser feature as red

  4. Any building that you evaluate as all or predominantly green with no red features is worthy of a serious negotiation with your landlord. This negotiation should include: base rent; term; escalation rates; loss factors ( an enormous issue in New York City where loss factors can often exceed 20-25%) landlord build-out allowance and number of months of free rent.

  5. Compare the new deal to the cost and disruption of moving: moving costs; changes to printed collateral, websites, and information systems; technology infrastructure; and potential loss of business during any physical move.

  6. Decide. If the comparison is close, go back and ask for one major concession that would make the deal a no brainer.

This economy has wrought a lot of destruction to small businesses. But it can also provide the foundation for sustained, long term growth.

Whether you choose to use it that way is just that.  A choice.

Change - Part 1

We’re in Chicago this week, packing up our home so we can complete our move East.

It’s been a two year process. In May of 2005 we listed our house with a vague idea that we would move to the New York area once it sold. We thought we’d have a last lazy summer in Chicago while we got used to the idea of leaving our adopted city and a house that we love.

We were in London the day the house was added to the real estate listings. At the Chelsea Flower Show. I know because that’s where I was standing when our real estate broker called. We had an offer. It had taken 47 minutes.

Two hours later they called back and offered us our asking price.

Panic set in. We came up with all the reasons why we weren’t ready. All the practical things that Chicago had for us. Doctors. Dentists. Vets. Dog day-care. All the friends we’d be leaving. The work we were doing at PAWS Chicago. All of this loss danced before our eyes.

We said no and took the house off the market.

My heart rejoiced.

Somewhere in the darker corners of my being, an instinct was hammering on the door of my fear trying to get out.

Hope is Not a Strategy

Remember when buying a home was a guaranteed return on investment?

Until some time early last year, the rule was that you bought a home as soon as you could, and as long as you kept it at least three years, you would sell it for more than you paid. In London, you only had to hold it for three months - and in some parts of town three days would do it. The possibility that a house or an apartment might one day be less than the loan we took out to pay for it was literally inconceivable. It just never occurred to us

When the real estate market headed south, we reacted too late because it couldn’t be happening. We had no tools to deal with it. So we waited for the ‘bounce’ and hoped. I think we all know now it’s going to be a long wait.

In this economy, owning a business has a lot of similarities. Most business owners have stock answers to dealing with downturns. And if you owned your own business in the post 9-11 trauma, you learned something about getting through tough times.

But these days the question is not how did you deal with the post 9-11 economy? The better question is what did you do in the aftermath of ’29. As in 1929. The only historical reference we have. These are once in a lifetime conditions and a lot of people are unprepared for that. Like the value of their home, they’re still trying to use an emotional model to deal with it.

Hope. Supported by luck.

But hope is not enough. Nor is it a strategy. To survive in an economy where breaking-even is the new win, you have to get past the emotional barrier that this can’t be happening. For many businesses, that means going back to the days when our first focus was on how to cover payroll. And if you’re not at that point, then here’s what you’re hoping.

That you get work. That it’s profitable. That you get paid on time. That you get paid at all. That you get paid often enough to cover your overhead. That your bank will lend you money if things get tight. That the job you’ve been waiting 6 weeks to come through will come through. That the check is in the mail. That things aren’t as bad as they seem. That things will be fine.

You might be okay with one of those. But beyond that, you need a plan that deals with bad and worst-case scenarios. And does so before you get to that point. Because a plan made calmly is always a better plan.

As Andy Dufresne said, “Hope is a good thing. Perhaps even the best of things.”

But even he didn’t think it was a strategy.