November 21, 2008
JustQuotes: As Come Commercial Realities, Will Go Residential?
"Next year, we're going to have the sublease swap meet of the century," said David Klein, a partner with San Francisco brokerage firm NAI BT Commercial. "Sublessors competing for the same tenant (will) all say, 'I can do the deal cheaper than you,' and the landlords will be playing catch-up. It's the harsh reality of a recession."
First Published: November 21, 2008 7:15 AM
Comments from "Plugged In" Readers
Lease commitments can be a big concern for companies that are downsizing. Next to payroll it is one of the biggest payables.
I know of one maturing startup that was sunk by an overly ambitious lease deal. They were bursting at the seams and signed a deal to construct a new building about 3-4X the size of their current location, expecting continued growth. This was 1998 and for those who remember that era commercial property had hit an all time high (if you could get it at all).
Of course the dot com bust rolled around which wasn't a fatal blow to this company : it simply lowered sales a bit. If they could stay in their current location they could have made ends meet. But the new building was ready for occupancy and the landlord was not open at all to renegotiate. Money bled, the stock plummeted, the company nearly folded, and finally got bought out at fire sale prices. Without that lead weight of the lease they would have survived intact.
That building still has never been fully occupied yet, so the developer also lost out a bit too.
Posted by: The Milkshake of Despair at November 21, 2008 8:50 AM
The commercial real estate market is going to get even worse than the residential market in the next couple years when the IO period on Billions of CMBS loans ends just as the rescession reduces the demand for commercial space with firms trying to cut costs.
Posted by: PresidioHtsRenter at November 21, 2008 9:34 AM
Decent comparison to the home market, but not really. Commercial leases are for fixed periods - usually five years, so you have a real incentive to discount the sublease price due to the short term remaining on them - it's either take what you can get, or you get nothing at all. Then on the tenant's side, a sublease has inferior utility to a typical lease due to the short term remaining (usually 1-3 years) and also due to the increased risk of a master tenant default - that is when the person you are paying your sublease rent to goes under and doesn't pay the master tenant. I guess this metaphor can apply to someone who bought a condo as a quick flip investment, but for most people who enjoy the occupancy of the home they are in, sublease rental space and the large discounts being offered for this are not a really great market indication for possible declines in sales prices. And yeah - I realize that the increase in sublease space indicates a contracting downtown employment base, and yeah, that ultimately is not great for the home market.
Posted by: Miles at November 21, 2008 10:59 AM
agree with phr above.
office leasing has hit a wall already.
when appraisals reflecting vacancy and rents are triggered it will bring a lot of 2006 - 2007 cmbs into play because of loan to values.
question is whether this will hit the class a high rise assets in sf and nyc, and not just lower quality assets/cmbs.
if it does, what happens to office deals getting pushed to market by servicers at once -- or not ??
dont think this is directly connected to residential rentals, which will fare stronger.
Posted by: Louis at November 21, 2008 11:16 AM
We already had this happen in our building (almost a year ago). The sublessee got a fully furnished space (for three years) significantly discounted, and they had some excess floor space which they are in turn renting out (sub-subleasing). Hard for commercial property owners to compete with that.
Posted by: EBGuy at November 21, 2008 12:18 PM