News & Research Archive

Expanding your Business in a Soft Market

Oct 26, 2009

 

I recently had a deal stall as a result of an option. Instead of a “true” fair market value option, the landlord wanted a fair market value or the rent, based upon the last year’s rent whichever was highest.  In a soft market tenants are nervous to accept a minimum rent base for fear that rents would actually be lower at the conclusion of the initial lease term. Landlords fearing the same thing do not want to offer an option that would allow for a rental rate to drop.

Normally, when I have been faced with this issue and the landlord is firm on having this language I have been able to convince the tenant that they are still in the driver’s seat with control of their space. If a tenant has a minimum rent that is higher than the fair market value at the time the option is to be exercised, they simply do not exercise the option and should negotiate with the landlord to obtain a fair market value.

Unfortunately, in this case my client was not willing to move forward with this minimum rent. At issue was what the motivation of the landlord was to not allow this minimum to be taken out?  If rents were below the minimum you would think the landlord would be more than anxious to negotiate a fair market rent to avoid potentially losing the tenant.

But, I learned that the landlord had a very different reason for not allowing the removal of this minimum. This landlord has remained quite successful in a down market. He is still buying in this market and expanding his business. His reasoning for wanting to keep the minimum rate in the option is that, if rents did collapse below the minimum then would be the time to address the future highest and best use for the property. His statement, “You build in a soft market to get ready for the next positive market.”

In real estate no matter what market you are in development takes time. You can easily enter a hot market - decide to build for that market - completely miss the market and then introduce your new inventory in a bad market. The old rule is simple but most of us do not have guts to follow it; “Buy low, sell high.”

Today is a buy low market. Building owners should be directed to do those lobby renovations, revisit the highest and best use of their buildings. Salespeople need to do the same thing; work on building your business by revisiting from the ground up what is working for you and not. Revisit how you operate each day. What systems do you have in place, is it time for an update? What kind of marketing are you doing to get the phone to ring?  Look at this market as an opportunity to shred bad habits and work on new habits that will be in place when your market takes that next positive turn.

This recession is now entering its 23rd month. This is one of our longest recessions and signs are starting to show that the economy is improving. Your time is short, start thinking about building not retrenching.

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Written by: Hans Hansson

E-mail: hans@starboardnet.com


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 24 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email hans@starboardnet.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.

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