lease flexibility

businessmen-office-building-blurred-motionOne of the indexes that we’ve frequently used to measure performance is lease flexibility. While signing a long term lease is a mutually agreeable contract for both tenants and landlords, we understand that from the tenant’s perspective, the more flexibility that a tenant can achieve with their lease, the better.

We look to secure termination rights, expansion provisions, partial give-backs, and rights of first refusal. All of these items are measured to ensure that the tenant’s strategic objectives are being addressed as part of the lease terms.

Termination rights are exactly what they sound like. The right, with some notice period, for a tenant to terminate the lease priory to the natural maturity date. There is typically some financial consideration from the tenant when activating that right, and the value of that consideration is established when the lease is drafted.

Expansion provisions can work two ways. This is essentially a “must-take” at a specific point during the term. This requires the landlord to hold space off the market and the tenant knows that the space is waiting when the strategic plan requires.

Partial give-backs are essentially the opposite of expansion rights. They give the tenant a right to give back a portion of the space at a pre-determined date. That way tenants can reduce their footprint if configurations change or head counts reduce.

Rights of first refusal provide tenants with ongoing protection from contiguous space getting leased up without proper notice. If the tenant has a ROFR, the landlord must provide proof of a bona fide offer from a third party. The tenant then has the opportunity to accept the same offer or pass.

As with all lease points, these issues are negotiable. The more leverage tenants create through an active bidding process, and the more desire tenants create for their tenancy, the more likely they are to secure these concessions from the landlord.

good Reads – CRE News from the week of February 16

I’m not sure if it’s because of all the nasty weather we’ve been having or just a slow week, but there wasn’t much corporate real estate news to report over the past week.

The Star Ledger had some good photos of the old Pansonic facility getting demolished. It sounds like they are doing all they can to recycle as much of the building as possible. Perhaps some of those materials will end up in new LEED certified buildings in the future?

While not a local story, the Washington Times had a piece talking about how a watchdog group was concerned about the USPS’s broker may be conflicted as they represent both the lessee (USPS) and potential landlords.

Business Insider covered Gallup’s annual survey of the happiest states in America. New Jersey has moved up 10 spaces to 23, from last year, cracking the top half. Now there’s something to be happy about!

Star Ledger:PHOTOS: Former Panasonic headquarters in Secaucus being torn down

Washington Times: REPORT: Outsourcing Real Estate Puts USPS at risk

Business Insider: The Happiest States in America 

Eliminate the building entirely?

file0001747897615There have been a couple of recent articles that may prove foreboding for the future of office space. A piece in Fastcompany.com (why the office is the worst place for work) is only the latest to beat the drum of remote working and an article in the Bergen Record (Snow day’s virtual classroom: Are lessons at home the ‘next logical step’) talked about how a local high school was testing out “virtual classrooms” to avoid taking yet another snow day.

Yes, Offices can be distracting, annoying places to work. Endless meetings, boring conversations around the water cooler, and office politics can sap our energy, enthusiasm, and drive. Whether the recent trend towards open environments broadens the problem is open to debate. But either way, complaining about an annoying office environment is not new (see every Dilbert ever published.)

And if high schools feel they can get away without physical premises, then any organization or company can make the same claim. High schools almost by definition need a building. But clearly, distance learning is an option that is being explored.

My counter-point to both of these observations is that we are by nature social creatures. While we may find interacting with some people undesirable, there is an inherent need for people to interact and cooperate as a group.

Individuals inside a company may have heads-down work that is best conducted in solitude, but coming together in pursuit of a common goal happens best when sharing a physical space. And even if high school didn’t teach you anything else, you learned how to deal with those annoying folks that didn’t necessarily share the same priorities or goals as you.

Do companies need to re-think the way they use office space? Definitely. Could schools get away without the buildings? Probably. But while eliminating the physical space may create more efficient individuals, I think it damages our ability to work as a group.

Good reads – CRE news from the week of February 10

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The Star Ledger put together a nice piece highlighting the impact that all of this winter weather has had on the economy. Losses tracked by major insurers show that “average annual winter storm losses have doubled since the early 1980s… Manufacturing output took a tumble in January… and car sales at Ford, GM and Toyota slipped.”

On a positive note, a survey from the NY Fed shows that a majority of companies in the tri-state region are expecting higher revenues and profits in 2014 and 31% plan to add staff.

NJBiz had an interesting article about how doctors will continue consolidating into ever larger practice groups. The piece focuses on the burden of additional insurance paperwork, etc, but this consolidation will have serious implications for medical facilities as doctors demand larger space for their offices.

The Bergen Record covered a story about a local high school that was trying virtual classrooms to avoid another snow day, and on a lighter note, Nabasco’s parent company has announced that they will continue to invest in the Fair Lawn bakery that produces Chips Ahoy. Route 208 will continue to smell like chocolate chip cookies!

Star Ledger: Economists track harsh winter’s effects

Star Ledger: NJ small businesses among those saying credit market good, outlook rosier in NY Fed survey

NJBiz: Small group practices may become thing of past because of Obamacare

Bergen Record: Snow day’s virtual classroom: Are lessons at home the ‘next logical step’?

Star Ledger: Nabisco parent to close Philadelphia bakery, shift more production to Fair Lawn and Virginia

The biggest secret to successful negotiations

file000646615146It’s simple, really… Have a plan and start early.

I wrote about this as part of a post a few weeks ago in relation to the amount of time it takes to complete a deal, but think it’s worth adding some detail.

Starting early and controlling the pace of negotiations is a very powerful. Time allows you to keep emotions out of the discussion, avoids hasty decisions, lets you identify priorities and soft spots with your counter-party, and prevents settling for unacceptable terms.  

Additionally, just giving the impression that you would  consider alternative options creates anxiety and gives you tremendous power in the discussions. It doesn’t require making demands, being aggressive, or trying to intimidate. It’s just being cool, calm, and collected.

A short case study that illustrates my point:

A technology company engaged us to help them expand and extend their lease. They engaged us with more than eighteen months to go before their lease expiration. The landlord was reluctant to agree to our terms so we were able to “go silent.” We let the landlord come back to us when we created doubt and uncertainty about our intentions.

When everything was done, we were able to reduce their rent by 15%, secure generous concessions, and start recognizing the savings three months before their existing lease expired. This allowed my client to reallocate some capital towards other priorities and invest in a couple of discretionary projects.

Good reads – CRE news from the week of February 3, 2014

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Al Jazerra America reports that “Rising prices and a boom in office construction are key indicators that the economy is growing,” a narrative that was reinforced by a story in Quartz.com covering a recent statement suggesting optimism from the president of ArcelorMittal, who expects steel use in the US to grow.

The New York Times reports that bank branches are getting smaller, another in a long string of stories about how technology is reshaping the way people use corporate and commercial real estate.

The Bergen Record covered a story about The Hampshire Companies acquiring a large property in New Jersey. While office space may not be a hot commodity right now, clearly industrial space is still a target for investors.

And on the lighter side, it’s impressive to see what a creative architect can do with a 425 square foot loft in New York!

AlJazeera America: Commercial Real Estate Prices Surging

Quartz.com: ArcelorMittal nominates “cautious optimism” as the theme of 2014

 The New York Times: With Technology’s Aid, Banks Squeeze Their Branches Into Smaller Locations

The Bergen Record: The Hampshire Cos. buys 200,000 square feet of industrial space in Saddle Brook

Design-milk.comMANHATTAN MICRO LOFT BY SPECHT HARPMAN ARCHITECTS

Looking Back – January 2013 economic reports at a glance

8-03-2 Nationally, the economy seems to be trending positively. The Fed Beige Book indicates moderate growth, consumer confidence is up, construction spending is increasing, and the service sector is expanding. On the state level, New Jersey is still struggling to create and retain jobs. The number of private sector jobs lost in December eroded most of the gains made during the previous year.

Fed Beige Book

Economic growth in the Second District continued at a moderate pace in late 2013. Contacts note that cost pressures have increased somewhat, while selling prices are mixed but generally stable. A growing proportion of business contacts cross the District–in both manufacturing and other sectors–report increased activity. Labor market conditions have continued to improve modestly since the last report. General merchandise retailers indicate that holiday season sales were mixed but moderately strong, on balance, with steeper discounting than last year. New auto sales remained fairly robust in November but there were preliminary signs of slowing in December. Tourism activity showed some signs of slowing in late 2013. Home sales activity picked up in the final months of 2013, while commercial real estate markets have been mixed. Finally, banks in the District report declining loan demand–particularly for residential mortgages–as well as widespread reductions in delinquency rates.

 In Northern New Jersey, Westchester and Fairfield counties, and across upstate New York, office availability rates were little changed at or near multi-year highs. Asking rents for office space were generally steady across the District and little changed from a year earlier.

New Jersey Employment

 For the second consecutive month, New Jersey’s unemployment rate dropped significantly, reaching 7.3 percent in December, which represents a 0.5 percentage point drop from November 2013, according to preliminary data released by the United States Bureau of Labor Statistics (BLS).

Private sector drops were posted in eight of nine major industry sectors, including leisure and hospitality (-8,000), education and health services (-6,900), construction (-6,500), trade, transportation and utilities (-5,400) and manufacturing (-2,500). Contractions also were reported in financial activities (-2,100), other services (-1,900), and information (-900). Gains were reported in professional and business services (1,000).

The drop followed an historic 0.6 percentage point drop in the rate between October and November 2013. However, preliminary data released by the BLS through its monthly employer survey also indicates total non-farm employment in December contracted by 36,300, including 33,200 in the private sector and 3,100 in the public sector, to a seasonally adjusted total of 3,942,300.

Department of Commerce Construction Spending

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during December 2013
was estimated at a seasonally adjusted annual rate of $930.5 billion, 0.1 percent (±1.2%)* above the revised November estimate
of $929.9 billion. The December figure is 5.3 percent (±1.5%) above the December 2012 estimate of $883.6 billion.

The value of construction in 2013 was $898.4 billion, 4.8 percent (±1.3%) above the $857.0 billion spent in 2012.

Conference Board Consumer Confidence Survey

The Conference Board Consumer Confidence Index Increases Again

The Conference Board Consumer Confidence Index, which had rebounded in December, increased again in January. The Index now stands at 80.7 (1985=100), up from 77.5 in December. The Present Situation Index increased to 79.1 from 75.3. The Expectations Index increased to 81.8 from 79.0 last month.

November 2013 Non-Manufacturing ISM Report On Business

Business Activity Index at 55.2%
New Orders Index at 49.4%
Employment Index at 55.8%

(Tempe, Arizona) — Economic activity in the non-manufacturing sector grew in December for the 48th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.