Archive for category: DCRE Report

As the Great Recession of 2008-2009 continues, its effects are felt in the commercial real estate market and submarkets of South Florida in the form of increased vacancies, lower rents, reduced income and cash flow to landlords and owners of investment properties.  If landlords, owners and their leasing agents are not agile enough or willing to bend, blend and extend existing lease agreements, then we will see this segment of the market go through what has happened in the housing markets.  However, no matter what action ownership takes the combination of short term loans coming due, the new rules of higher equity requirements, increased capitalization rates and appraisal values might still tilt the balance downward.  But no matter, the mortgage debt side of the equation is a subject of a later newsletter.  We will discuss here the ownership side.

What is a landlord and it’s representative to do when approached by a large major tenant with several years remaining on their lease term, to reduce rent and/or give up space back to the landlord?  There are various concessions and amendments that can be offered and considered.  The main element has to be to save the tenant and keep them from vacating the space and moving to another location.  Other questions are:  How much space do they occupy? How long have they been a tenant?  What is their track record in rent payments?  Also are they willing to give the landlord financial records of the past 12 to 18 months and a projection of their income for the next 12 to 18 months?  Will their request to give back seriously affect the cash flow of the property?  And lastly, what is the future of their business?  And most important are they going to survive?

Answers to these questions and the willingness to disclose their present and future financial condition will greatly affect the landlord’s ability to bend, blend and extend.   Help can take various forms:  rent abatement (free rent) for short periods to give them breathing room, rent deferrals with accrued deferrals repaid at a future date with interest, reduced or eliminated rent escalations to provide “breathing room” for a period, give back of space with or without a future take back, updating of base year for operating expense pass-thru to a current year or eliminate it entirely.  More help can take the form of paint and new carpet to “refresh” their space in return for extended lease term, say two or three years remaining extended to five to ten years.

Finally, a rent per square foot reduction and some parking rate concession for a short term (12 to 18 months) can go a long way to help a tenant survive these rough economic times.  The key is, will you as the landlord or his representative be able to make the value judgment: “Will the tenant survive?”  If you have strong doubts, do not play the bend, blend and extend game.  Let the space go vacant and find a tenant to occupy the space at a rate where you as the landlord can survive!

CALL US, WE KNOW HOW TO BEND, BLEND AND EXTEND.  WE ALSO KNOW HOW TO SURVIVE!

by Steve Magenheimer

Last Friday, I attended with 130 other professionals the presentation of the Official 2009 Annual Miami Office Market Report by the Commercial Industrial Association of South Florida, (CIASF).  Data for the report was based on information from Black’s Office Guide.  The report was prepared and presented by my two able office mates, Tom and Andrew Dixon.  There was also a panel of office leasing professionals sharing their views of the office market and presenting estimates for the remainder of 2009 and 2010.

As an office leasing professional in South Florida for over 30 years acting as both a tenant and landlord professional broker representative, to me the glass is always half full.  This market for the foreseeable future will be soft and stagnant, with higher vacancies, lower rents and greater concessions by landlords to keep existing tenants and attract new ones, particularly in the Downtown and Brickell Districts.

When the new office buildings hit the market in 2010, the Miami-Dade office market will have a total close to sixty million square feet of rentable space.  Where are these tenants going to come from?  The CIASF report shows that the number of businesses with more than 100 employees have shrunk to less than 300.  Landlord/Developers building high-rise structures with large floor plates will find that users are few and far between for their space.  Only larger tenants can efficiently use large floor plans.

The economy of South Florida is based on three structures holding up our communities; tourism, finance/trade and construction.  Construction will not be a factor in the near term and tourism does not create a significant office demand.  A majority of the office space I have leased is in Coral Gables, home to multi-national tenants based here to service their Latin American businesses.  They are not large users of office space.  Typically, they will occupy 1,500 to 2,500 SF.  Some landlords are aware of this requirement and have tailored their marketing programs in this direction.  Other landlords, many on Brickell Avenue and Downtown are still looking for full floor tenants.  Most of these will be large regional law firms that continue to see opportunities to locate to Miami/Coral Gables to service their international clients in Latin America.

So, where are we and where are we going, and better yet, how do we get there?  First, with few exceptions, new tenants to the market are going to be few and far between.  Landlords will have to offer huge concessions to attract them.  These will take the form of free rent, moving allowances and generous tenant improvement budgets.  A bit of history here, as the landlord’s representative in the Texaco Latin America-West Africa division lease for 72,000 SF in Coral Gables twenty five years ago, the lease provided an 18 month rental abatement on a ten year lease.  Plus, turnkey tenant improvements and free parking!  The effective rate was in the mid $20’s/SF and the face rate was in the low $30/SF.

Other that new tenants, landlords have to react to existing tenant needs to retain them.  Reduced rents, moving base year operating expenses pass-thrus and rent abatement will be the order of the day.  Otherwise we will see a massive game of “musical chairs” throughout the market.  With tenants moving from one building to the next for lower rents.

We will get “there” by having leasing professionals, landlord and tenant representatives educate and inform landlords on the market conditions that will require them to be receptive, creative and realistic to the current market circumstances.  Those that do, will enjoy reasonably full buildings, others will suffer vacancies of up to 50%! Remember, those in the business of office leasing have to believe the glass is half full and will stay that way.

CALL US: WE KNOW HOW TO KEEP THE GLASS HALF FULL

To view the 2009 Office Market Report go to www.dixoncommercialre.com click on 2009 Office Report

By: Steve Magenheimer

As an active real estate broker in South Florida the changes I have seen in the market for real estate are both upsetting and beneficial.

The upsetting part began in 2005 and 2006 when money was so plentiful that almost any borrower could qualify for a loan.  These borrowers realized that if they could purchase property with 100% financing and the value of the property went up they made an infinite return on their “investment.”  In fact, this looked so good that many buyers-speculators purchased multiple properties solely with the intent of reselling them at a profit.  This led to groups of individuals buying and selling to themselves at ever increasing prices.  Using these systems condominiums appeared to be doubling in value in less than a month.  As the prices increased this drew more and more speculators into the market.

How was all this possible?   Easy money based on loans without income verifications, credit reports or proof of ability to repay.  Some of these loans were called “NINJA” loans (No Income No Job or Assets).  Who provided these loans?  Mortgage brokers wrote these loans, they were sold to a wholesaler, who sold them to an investment bank.  The investment bank packaged them and resold them to investors.  Everyone made a profit and hoped that they could resell the loan before the borrower missed a payment.  The problems started when the “NINJA” borrower stopped making the payment because he could not flip or resell and did not have the income to make the payment.

Jump to mid-2006, the impact of this speculation and false demand was residential construction and speculative building not seen since the early 1970’s.  All of this buying and selling at ever increasing prices created an apparent wealth from real estate ownership.

Housing became so expensive most of the residents in South Florida did not have an income to cover the cost of housing. Of course this also led to higher taxes and insurance premiums because of the apparent increase in values.  The chain started to break in mid-2007 when foreclosures increased, construction spending declined and unemployment started to rise.

The beneficial part of this cycle is that the cost of housing has declined and more families should qualify to obtain home loans, real estate tax assessments will decline and insurance premiums should decline because of lower insurable values.  As the real estate market stabilizes and the existing inventory is occupied the market will recover.  If history is a guide we have had similar real estate booms and busts every 10 years.  The first real estate bust I experienced was in the early 1970’s and they repeated on a ten-year cycle.

When all of the new proposed financial stimulus packages are funded I predict a new round of inflation. It may take two to three years but the trillions of dollars being funded by the government will bailout the economy and bring on a new round of inflation. This in turn will help the banks with increases in the safety and the value of real estate loans. This inflation will raise the price of everything including fixed assets such as real estate.  My recommendation is that if we have a new round of inflation then the best investment you can make is to buy fixed assets such as real estate with a long-term, low interest rate loan which can be repaid with inflated dollars.

Call us we have been through the Cycles

By Tom Dixon

Gary Sisler’s —-Holiday Thoughts

Most of us have experienced seeing real estate recessions and bounce backs…but, this one seems more serious, perplexing and sobering. We would like to think that the savvy pundits would be more evident in hoisting warning flags. It seems to say that we are ill served by the press which has so few trained to write with any meaningful experience with economics.

Globalization—we now learn that our economy is entwined with global influences. Global investors were attracted to our packages of high yield mortgages. Ratings of those packages overvalued their credit strength. Greed on Wall Street is difficult to regulate yet alone monitor.

Politics has not helped prudent real estate investors. Fannie Mae and Freddie Mac, encouraged by Congress became such an important player Congress could not let it falter. We need to understand that there is a price-penalty to pushing the purchase of houses with scant regard for adequate down-payment and verification of the borrower’s ability to pay.

For the older part of the population this is going to translate into much more conservative spending and investing habits. What does all this mean? Hang on, it certainly looks like 2009 is going to be a wild ride. However, for this Holiday try to forget the negatives as best you can and spend more time with your families. Love for each other should not be affected.

Steve Magenheimer’s— Holiday Thoughts

This holiday newsletter written a week or so before Christmas can be a reflection of the year past (2008) or it can be a projection of what we believe 2009 will bring.

In a year of credit crisis; the largest bank failure in US history (Washington Mutual) and the largest bankruptcy (Lehman Brothers) and a national election that elected the first African-American to become president of the US, it is difficult to predict that 2009 will be a peaceful year. In spite of the recent shoe throwing incident at President Bush, the war in Iraq is virtually over, and the US has a reliable (?) ally in the Middle East to help stabilize the region. Afghanistan will be a challenge for the new administration to say the least.

Most pundits say 2009 will see more of the same failures, foreclosures, bankruptcies, etc. As an individual commercial real estate broker, specializing in office leasing and investment sales, there is little I can do to effect change, beyond staying positive and making the right verbal confessions. But if I continue to do the same things as in the past, and they are no longer working, I am a fool.

So at TMC we look to the New Year with anticipation. Conditions may worsen before they improve; we are not at the bottom yet. It is not important to know when the bottom is reached and the upturn starts, let the experts do that. What is important is how you react to the process and what adaptations you employ to not only survive, but prosper.

God Bless All, Merry Christmas and a Happy New Year. And, when you give thanks this season, bless and ask the Lord to watch over our brave troops in Iraq and Afghanistan.

Tom Dixon’s —Holiday Thoughts

For the past several days Miami has been enjoying cool clear weather which is so different from the rainy, hot weather during the summer. And, just as it is pleasant now I can guarantee that in 6 months it will be summer time and the rain and heat will return. This cycle of weather is natural and we all accept this cycle of change.

Now that we are in the middle of very severe recession I think it is time to look forward and consider what I call the “Clock of Real Estate” but could just as easily be called the “Clock of the Economy.”

The clock starts at noon with an oversupply of real estate..

this leads to increasing vacancies which leads to ….

declining prices which leads to declining construction…

following this will be low vacancies followed by….

increasing prices which encourages …

more construction…

finally we are back again with oversupply…

and the cycle repeats itself.

Change the words from real estate to cars and you see the same pattern. What this tells us is that there is an economic cycle just like there is a cycle to the weather. As hard as it is to believe that it will be hot this summer I can guarantee that it will be hot this summer. By the same token I can assure you that we are going through an economic cycle and sometime in the future we will realize that the hands on the “Clock of the Economy” have moved and we have gone full cycle.

Andrew Dixon’s —Holiday Thoughts

What happened to 2008? It’s seems like just yesterday that people were sleeping on street corners in lines ready to drop down 20% on their third condo unit on South Beach, like they were buying tickets to the concert of the century. Today million dollar CEO’s are sleeping outside Congress waiting for their chance to beg for a loan. It’s been a pretty amazing year as we’ve slid from one end of the economy to the other. Or have we? In some respects I think the general populace is still living in denial of what is happening around us. Perhaps eventually we will accept that not everyone deserves a mortgage, or a new car every 2 years. When the make-believe money that created the credit-crisis gets taken away, which it must, the effects will be brutal, but until then I’m still getting credit card offers every day. The powers that be are seemingly willing to spend every dollar Congress is willing to give them out of your tax pocketbook in order to maintain real estate prices (not values) that were built on smoke and mirrors (fraud and un-sustainable lending practices.) And likely just when we feel the worst is over, and the storm has passed, we’ll all walk outside to realize it was just the eye of the hurricane. Luckily we Floridians are used to this concept. I apologize for the negativity, but I don’t believe the recovery will be nearly as fast as the fall.

What a strange title for a newsletter?  Why would one think his phone is broken?  It is not ringing, sometimes not at all, other times very seldom.  Why do you think this is occurring during the dog days of August 2008? There are several reasons for this state of affairs and we will discuss them and see what we can do to remedy the situation, correct the lack of activity and plan for it not to happen again.

First, the simple truth is people do not use their business phones as much as before.  Email is the major method of communication, providing a record on the computer and even a hard copy if downloaded and printed.  You need to know, however, that the law treats an email message as an oral communication.  If you need a written message, download, print and mail the email to the person with whom you want to establish a written record.

Second, the current economic “correction” has reduced activity in the real estate market place to a dribble of its former flow.  The writer leases high rise office buildings for a living and activity in the market I work is slim or non-existent.  For example, a beautiful penthouse office space, full floor, private elevator lobby, private lavatories, separate meter for electricity, five large office, conference room with a wet bar with gorgeous views of downtown near the edge of the Gables.  This sublease has been offered at the low rate of $32/SF with few takers.  Now it is being offered at the mid-twenties, net of electricity and the phones are still not working.  Are they broken or are we at a standstill in our office economy?

Next, could one of the reasons the phone does not ring is we are not doing a good job of marketing the space.  Building signage, new flyers to target specific portions of the sublease, broker contact, open house for brokers are some of the traditional methods of marketing sublease office space.  We are now taking some less traditional avenues to fix our phone.  One approach is developing mailing lists from directories of specific professions such as law, accounting, small business, architects and bankers.  Direct mail has historically been a low response method, but it will only take one to win the day.

Since office leasing is very broker driven in the South Florida market, a very generous commission split has been structured for the tenant representative that brings a deal.  Also, the master landlord for the building indicated he will entertain a new lease for the sub-tenant for a term beyond the sublease term and will pay a commission to the tenant representative broker.  The stage is set for the achievement of the objective: the sublease of the penthouse at such a dynamite price.  Incidentally, the sub-landlord will provide new carpet and paint for the “right” subtenant.

Need we say more?  The broken phone will be fixed.  Call will be received from qualified prospects.  The sublease will occur.  Time will overcome and fix my broken phone.

CALL US WE KNOW HOW TO FIX PHONES THAT DON’T RING – Steve Magenheimer