Commercial real estate often has a ridiculously long sales cycle, through property research, tours, negotiations, contract reviews and legal. Deals can take six months or longer to finalize. That being said, the past year has taken this to new extremes as the entire nation has adopted a "wait and see" philosophy.
Starting in early 2008, companies were starting to feel the impacts of the local housing market crash. No longer were people allowed to use their home as an ATM machine and pull money out to start new ventures, purchase goods, toys, or other real estate. This had a profound impact on the profitability of companies across the board. Additionally, the stock market collapsed before our eyes and the precipitous decline of the northern Nevada economy has been evident and, frankly, over-documented.
By mid-2008 the election process was in full force. Business owners put their moves, expansions, and building purchases on hold and instead chose to wait until after the election to make a decision. Election came and went. A new president was chosen. All signs were pointing in the right direction, yet owners still wanted to wait.
Post election, we entered the dead zone of commercial real estate leasing: The Holidays. Understandably, business owners are hesitant to move their company and have all their employees transition during the
Holiday season. So, while companies perhaps were in desperate need for new space, their move was pushed back to 2009.
Come 2009, owners continued to delay any decisions until after the inauguration. Hoping for the new president to somehow have a profound impact on the economy and the northern Nevada market, the waiting game has continued.
In addition, companies have been waiting for this commercial real estate market to finally bottom out.
While it is next to impossible to ever tell the time and place that any market finally hits bottom, all signs are indicating that that time is coming. Building owners and developers are becoming more aggressive than in the hopes of obtaining tenants or buyers. Thirty months ago, a tenant was lucky to get two or three months free rent. Now there are properties offering a year of free rent. Rent is down across the board, and in some cases consummated lease transactions are 30 percent below rents of a few years ago. Garden office buildings are on the market for 20 percent below the peak, and the costs to build these projects have not dropped near that much.
In addition to the typical negotiation techniques used (length of lease, lease rates, free rent, tenant improvements, etc.), developers are becoming more creative in attempting to attract tenants:
* Lease assumptions: Lease or buy a building and the developers will pay what is remaining of your current lease obligations.
* Lease to own: Lease a building and apply 10 months of rental payments to the down payment, thus requiring only 3 percent of the purchase price up front.
* Mortgage payments: Seller will pay the first year's mortgage payments giving buyers the capability to lock in today's purchase price.
* Lease guarantee: Purchase a building and the seller will sign a lease and guarantee rents for a period of time. This is very effective when a company is looking to expand in a couple of years.
Obviously, the most important item to consider is the success of the company's core business. This economy will recover. The northern Nevada economy will rebound. The real estate market is a cyclical market and always has been. And, like all cyclical markets, values will rise once again and many programs and incentives will no longer be available. Therefore, to the group of company and business owners that are currently holding off on their decision, waiting for the dust to settle before they make the move or consider relocating: This is a tenant's and buyer's market. Take advantage of it. The time may be right, and the waiting game may finally be over.
Kevin Annis works for TD Realty Advisors specializing in commercial real estate sales, leasing and investments. Contact him at 742-2539 or kannis@tdnev.com.
