Bad news in the Manhattan commercial office space market can be good news too

The direct relationship between unemployment and the demand for office space is a clear and obvious one. It then becomes clear that the Manhattan commercial office space market will feel the pain of the recent announcement of over 533,000 jobs lost in the U.S.-most coming from white collar jobs. The good news is that office leases expire. Decisions have to be made. Business conducted and the end result, office space will be leased. Now that the real estate market is fast becoming skewed towards the tenant, it creates opportunities for tenants that have the strength, confidence and financial history to know how to weather the storm. So what should business owners do in this real estate market place? The assumptions: 1. This is a successful business; 2. The business has experienced a leveling off of demand which has effected their growth for 2009 perhaps into 2010 but wants the flexibility to expand in the future; 3. Tenant has been in business for at least 5 years; and 4. Square footage required: 5,000 to 10,000 rentable s/f. Here are a few examples of what has taken place in the commercial office space market place: Example 1 Tenant's lease comes due eight months from today. Secure an exclusive broker to represent you in the marketplace. (See article written by DAK in the Oct. 28-Nov. 3, 2008 issue.) Agent should conduct discussions with the tenant's current landlord and educate the tenant by looking at outside alternatives in the marketplace. Markets like this one can change quickly but now, time is working in favor of the tenant. Simultaneously investigate outside opportunities while conducting discussions with the existing landlord. Example 2 Tenant signed a lease less than a year ago close to the height of the commercial real estate marketplace and now wants to save money. One of the biggest mistakes many business owners will encounter is they do not communicate their concerns to the landlord. In this case silence in not golden. Let the landlord know how the business is doing, set up a private meeting to let your landlord know. You will be taking the first step to attempt to sublet your entire space or a portion of the space (note as a business owner, you will/should have an exclusive real estate broker assist you in this process) once again depending on your time table. If you are not successful subleasing the space in a reasonable amount of time you and the landlord will need to have another meeting. Example 3 Tenant is on month to month tenant. Many tenants feel they are in the driver's seat by being a month to month tenant. Not the case! Many tenants do not pay much attention to the Holdover Clause of their lease, which allows the landlord to charge the tenant 1.5 to 3 times the rental if the landlord gives proper notice. In most cases, the tenant feels they can simply give 30 days notice to the landord when they are ready to move out of the building. What the tenant does not anticipate is the landlord has the same ability and can give 30 days notice to the tenant to vacate the space. The tenant may have nowhere to move. Attorney's fees and negotiating from an extremely weak position is never the desired situations. In addition this situation is typically unanticipated and un-budgeted expenses are incurred. Bottom line, avoid month to month arrangements. There continues to be great opportunity for businesses that have a solid history of success and upgrading to a better building. Office space rental rates in Manhattan as of December dropped over $5 per s/f. After rents crested mid year but by the end of 2008 had pulled back over $5 per s/f. Opportunities like this could mean the difference of an avenue location or side street. This $5 decline came mostly in the fourth quarter and will most likely continue into 2009. It could be the time to trade up to better building. Downtown market continues to offer revitalization programs that include lower real estate taxes and deals do not carry the 3.9% commercial rent occupancy tax. The one important bit of information that has not been mentioned is to ensure your broker has the experience, knowledge and strong relationships within the industry. There are many owners who own properties with little debt and can renew tenants at whatever rent they want. Further these landlords can make a long term deal which benefits the tenant and the landlord. DAK Commercial Realty, LLC has been advising, representing, locating, and securing office space for tenants and landlords for over 23 years. David Kahane is a principal broker at DAK Commercial Realty, Inc., New York, N.Y.