We are currently representing a buyer who’s in the market for a commercial building, condominium or cooperative. As I’ve been scouring the market, I’ve noticed that sale prices have increased dramatically over the past year. However, rental rates for retail property have gone down over the same period. Interest rates have been so low for so long that there seems to be a disconnect between rental rates and sales prices (i.e., a bubble). This is reflected in the fact that sellers are asking for capitalization rates under 5%.
On March 16th, I had the great pleasure of being honored by the Mercy Center of the South Bronx. Mercy Center was founded in 1990 to address urgent problems of the women and children of the area by providing an oasis from a violent home, a place for children to learn to read, and for parents to study English as a second language. Enclosed is a video of my acceptance speech. I hope it will inspire you to support the important mission of Mercy Center.
In an ideal world, commercial tenants would work with both internal and external stakeholders to determine how much space they need before looking at properties. Management would go through a strategic planning process to figure out where the company is going, how it’s going to get there, and who’s going to take it there. The company would consult with an architect to determine its exact space needs, and necessary board or upper management approvals would be obtained beforehand.
Recently, I’ve started working with a national company based in the midwest. Their New York office is located in Westchester County, but they have become eager to relocate closer to the city. One of the places they are considering is in the Bronx. I thought this was an interesting choice, as I have written previously about how relatively low and stable the rents are in nearby Westchester. My client elaborated that it wants to be in a more densely populated area because of its sales organization; the more people near it, the better off it is.
In the real estate business, it’s no secret in Manhattan that when you get out into the boroughs or suburbs, the quality of the landlords changes quite dramatically. It’s not true of all landlords, but there is a definite mindset that begins to take hold as soon as you cross the Hudson or East River: Tenants are a necessary evil, not valued customers. As a tenant representative broker, the landlord is an important consideration; the landlord provides a multitude of services, including security, construction, elevator service, electric, cleaning, and maintenance.
One important reason to hire an exclusive real estate professional “Why hire an exclusive real estate broker to represent you when finding space?” is a question that I find fairly often. Some benefits, like managing the logistics of viewings, are easy to imagine, but there are others that many would-be tenants do not come to appreciate until they are in the process. In the interest of getting around that gap in understanding, in this post, I offer a case study.
Throughout my career, I have seen many situations in which doing business is made difficult by a dysfunctional power structure, but there are two that are particularly vexing:
1. A person has all of the authority, but none of the responsibility; or
2. A person has all of the responsibility, but none of the authority.Authority: Landlord Responsibility: Project Manager I once worked on a project that was overseen by a tenant’s project manager and the landlord. The two did not get along, which is very typical because the project manager is usually holding the landlord’s feet to the fire.
Have you ever taken a moment to appreciate the curves of a quiet country road surrounded by bursts of yellows, reds and a last touch of green? It truly is a pleasure to drive in and out of rock formations, farmland, and forests – with bends and rises just gentle enough to let you satisfy your need for speed. When I spend time at my place in the Catskill Mountains, approximately 2.5 hours from New York, I notice a world of difference in terms of geography, topography, and economics.
I was at a networking event recently where we were asked to do an intellectual exercise. The speaker posed the question: If you had a magic wand, what would you change—even if it was disruptive—to make your life better? The point of the exercise was to get us thinking about our businesses and the services we offer from a different perspective. As I listened to other people respond, I had a realization: there can never be a magic wand in the real estate business.
When looking for short-term space, a sublessor’s interests compete against the interest of its potential landlord. I’ve been working with a client who has been seeking a lease for a short term (i.e. under two years). The best possible scenario is a sublease from a tenant who has the extra space on a short-term basis. For the sublessor, it is found money, and for the subtenant, it gives them the short-term space they need. Additionally, the subtenant does not have to carry the burden of the liability that comes with a long-term arrangement.
Goldman Sachs alum David Valdez officially joined Mohr Partners as a Managing Director last month to support our mission of advising our clients to navigate the complex world of New York City commercial real estate with our strategic representation and market analysis. In addition to working at Goldman, David has amassed years of experience at Cushman Wakefield and CBRE. He brings with him a whole new dimension to what we’re doing at Mohr Partners, including:
It’s a presidential election year, and while that often has implications for markets, it is also a useful insight into people’s thinking. Politics engenders passion, so what we often see are people entrenched in their positions—sometimes while ignoring potentially important points of view. Businesses that are looking for commercial office space can also exhibit this lack of objectivity, but instead of political candidates, they are often dead set on a particular building or neighborhood.
Recently, there was an article in Bloomberg News entitled Negative Rates Hit Global Shipping Market. The article details remarks fromNils Smedegaard Andersen, CEO of shipping giant A.P. Moeller-Maersk (“Maersk”). Andersen makes a good case for the assertion that “cheap money” is hampering consolidation in his industry. Low-interest rates have been enabling banks to keep marginal shipping companies in business, according to Andersen, and the result is lower shipping rates and excess supply. One of Maersk’s competitors, Hanjin Shipping Co. of South Korea, has recently been forced into debt restructuring in order to cope with lower revenue.
There is seemingly an infinite number of ways real estate is owned and sold. In most cases, the owner of real estate has a deed for a property, and when the property sells, the deed is transferred to the new owner in exchange for value. In other cases, the property may be owned as shares in a corporation. I recently closed a deal for a shareholder of a minority interest in a building in Tribeca, New York City.
As part of a program called the Counseling Corps that is sponsored by the Counselors of Real Estate (“CRE”), we periodically volunteer for nonprofits and municipalities, or other religious, educational, and government clients who need help with a complex real estate problem. A handful of counselors travel to the client for a week of fact-finding; at the end of their visit, they make a presentation; and within 45 days, they submit a report with recommendations.
When an entity is in search of a new space for its operations, there are some key players who make the deal happen. I happen to be a licensed attorney in New York State, but in my role as a tenant representative, I am limited in the legal advice I can offer to my clients. I can’t act as both a broker and an attorney because it is considered unethical by the bar association; a broker’s incentive is to close the deal and an attorney’s incentive is to protect his client. These roles can be in conflict.
If a new building department regulation goes into effect subsequent to the signing of a lease, either the tenant or the landlord has to comply with that regulation. In most cases, the landlord stipulates that the tenant is fully responsible for complying with all laws and regulations. However, it is usually possible to prevent the tenant from being fully responsible for capital improvements. An excellent example of this is retrofitting a space for a sprinkler-based fire prevention system.
Technology has improved the way warehouses and delivery trucks deliver. Recently I met with some clients who were in the market for a warehouse space. Normally, when discussing a space, the client’s greatest concerns include the square footage, IT connectivity, and usable space—but in the world of warehousing, technology has reset the paradigm, and vertical space has become even more prized than the two-dimensional area of usable space.
Last year I had the pleasure of representing a foreign client who wanted to find a retail space. One of the storefronts we were considering was adjacent to a large corner unit that was leased to an accessory unit of a world famous brand. Recently, I found out that the tenant, who had only been in the space for less than a year, decided to close the store and sublet the unit for the remainder of the lease—even though the tenant had invested millions of dollars into the construction and design of the space.
Recently, I attended a networking event that brought up the topic of how our clients perceive us. They framed the discussion around three questions:
- How do your clients perceive you?
- What makes you valuable to your clients?
- What characteristics help seal the deal with a new client?
After Winter Storm Jonas (more popularly known as Snowmageddon 2016), New York City had 2.5 to 3 feet of snow in places. It was hard not to notice that some patches of sidewalk were shoveled while others weren’t, requiring pedestrians to navigate alternative routes. Sometimes, this means walking out in the street, which can be dangerous. I experienced this first-hand in front of a local H&R Block store. So who’s responsible?
Many financial advisors tell their clients that past performance does not guarantee future results. While they make a good point, they ignore the reason there are so many predictions and forecasts out there: It’s fun. That is why I was glad to sit down with my own data recently and come up with some predictions about the trajectory of the real estate market in New York.
Prospective tenants are often resistant to hiring an “exclusive” broker. They feel that if they hire just one company, they’re not going to get to see the breadth of the market and that by dealing with multiple brokers, they will get to see more properties and wind up with a better selection. The reality is quite different — there are valuable benefits to going with just one broker. Some of the main reasons you should consider an exclusive broker:
“Don’t let a crisis go to waste.”This proverb from Winston Churchill, made famous again in 2008 by Rahm Emanuel, is applicable to many things in life, including the expiration of a commercial lease. The moral of the proverb, as Emanuel told the Wall Street Journal 7 years ago, is that a crisis presents “an opportunity to do things that you think you could not do before.”
As many tenants know, rents have been rising. The stock market peaked in May (and is threatening a new high again), and according to regular cyclical patterns, it is set to continue rising for another year or two. Continued increases in rental rates can take a HUGE bite out of a business’s bottom line. Consider the following scenario: Back in 2008, when you rented your 10,000-square-foot office space, rent was $40 per rentable square foot.
The stock market is a leading economic indicator. It affects the psychology of companies. When the market is up, there is a tendency toward growth and expansive thinking, but when it’s down, people are less likely to spend money on real estate and investments. In New York City, approximately 25% of the economy is tied directly or indirectly to the stock market. Looking at the last 20 years, we can compare the Dow Jones index levels with those of asking rents in New York and see a pattern.
Denver, Houston, and Edmonton are just 3 of many cities that are heavily dependent on oil and gas. A prolonged slowdown in these markets, as we are seeing now, creates a tremendous ripple effect, impacting office spaces, retail spaces, labor markets and more. But where there are problems, there are also possibilities. Tens of thousands of people are being laid off in the current gas and oil downturn. But even after the economy slows down, the human capital remains in these markets for some time,
The Latin phrase caveat emptor, or “buyer beware,” is especially true when making real estate purchases. Many businesses assume that the infrastructure of a property they buy functions. For example:
- Does the air conditioning work?
- Do the elevators work?
- Is the structure sound?
- Does the roof leak?
- Is the boiler safe, adequate and operational?
- Does the plumbing work?
The best time to leave a property is upon expiration of the lease term, but there is always room for negotiation. Several months ago, a client (the tenant) had a lease that was close to expiration. The tenant was about to sign a lease for a different space, but something happened: Another property came on the market, they looked at it and decided it was much better suited for their business. However, starting all over in the negotiation process would have put the tenant over their current lease expiration date. In order to acquire the new space, the tenant would have to extend their current lease, or pay a penalty.
Most companies are reactive in their commercial real estate needs, especially as their business locations increase. To become proactive, companies need to see the big picture – there needs to be a vision that comes from the top. If the CEO or Division Manager hasn’t defined a vision for the business, it’s hard to be proactive with real estate. A vision tells people where they want to go, so real estate can be planned and managed in order to support that vision and those business goals.