The Commercial Classroom: Here we go again - by Edward Smith Jr.

This column is offered to help educate agents new to commercial and investment brokerage and serve as a review of basics for existing practitioners.

Interest rates today are 7.6%, and they may increase further this year!

I say “again” as many of us have been in this business for a very long time. Interest rates were over 10% from 1979 to 1990. Thirty-year mortgage interest rates in October 1981 hit 18.63 %, the highest in U.S. history.

How did real estate agents make a living? Fortunately, for those of us in commercial real estate, we were able to focus on leasing.

Traditionally, it was best for tenants to have a relatively long lease, five years or more, and/or renewal options. If business was going well, remaining in the same location was preferred unless they needed to move due to growth. Landlords also like longer leases as vacancies disrupt their cash flows and cause additional marketing expenses.

The COVID-19 pandemic had a severe impact on the retail and office sectors throughout the second quarter of 2021. At its peak, the government mandated building closures. As a result, some businesses were permanently closed; others started to reopen very slowly. Ways of doing business has changed, with significant numbers of office workers continuing to work from home. Retail took longer to recover, and people did not return to mall shopping until 2023; employers increased the number of their part-time workers.

Also, the pandemic caused tenants in office and retail businesses to request shorter lease terms and multiple renewal options, which became the trend. A one- or two-year lease with an option to renew became common. Retailers were also concerned about product and materials availability and sales activity. Landlords reluctantly agreed to the shorter terms rather than have their space vacant.

With the current interest rate, building sales are expected to decline, so we should focus on commercial leasing. The good news is today many of these shorter-term leases are now expiring, creating more opportunities for leasing.

To take advantage of this, it’s time to go door-to-door cold calling. Systematically, canvass your market area.  Pick a block in the center of town and over the next week, visit every business owner there; then next week, visit all the businesses across the street. Continue to prospect every day until you get to know every business owner in town.

Prepare a script in advance. Introduce yourself and state you’re a commercial real estate agent. Maybe say you drive by frequently and have been meaning to stop by. Remember we are in the “people” business. Be friendly, show curiosity; you are there to gather information. Ask them what they do, compliment them, inquire how business is. Looks like you have about 2,500 s/f here; is that correct? Establish a relationship.

Then ask how long you have been here. Perhaps they will tell you for four years. Previously in this article, we stated that historically leases were done in five-year increments. Now say I bet your lease is up next year, if wrong they will correct you. If that is true, you can offer to help them find a new location or to negotiate on their behalf with their landlord. Perhaps their lease is not up for a few years, but now you have their lease expiration date. Would they be interested in buying a building for their business?

Inquire who their landlord is and where they are located. Make an appointment to meet with the landlord. Tell them what you do and ask if any of their tenants are not renewing their leases. Would they be interested in selling or buying another investment?

When you start to ask the business owner about their lease, they may tell you they own the business and the building. Have a few flyers of available buildings for sale with you. They may be ready to make another investment. Or perhaps they may want to sell this building.

Catalog all the information you have gathered on your computer and set a return date in your calendar to visit again. You should be able to complete your initial interview in 10 to15 minutes. You can canvass an office building in the same manner. 

Take advantage of today’s opportunities and start leasing

Edward Smith Jr., CREI, ITI, CIC, GREEN, MICP, CNS, e-PRO, AHWD, CIREC, is a licensed real estate broker in N.Y. and Conn. with Smith Commercial Real Estate, Sandy Hook, Conn.