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From the Houston Business Journal

The cheapest rent does not guarantee the best deal. Make sure your landlord is on firm financial footing. Find a qualified tenant representative to advocate on your behalf.

Those are some of the guiding principles businesses should follow before signing a lease, according to commercial real estate experts.

Committing to leasing space — whether in an office building, shopping mall or warehouse — is a major decision for any business, but one that owners and managers often make without being armed with all the facts.

The reasons vary — they are so busy running their companies that they often do not have the time to research the market and seek proposals, they have never negotiated a lease, or have only limited experience doing so.

Or, they take the word of a real estate broker who represents the landlord, not paying attention to the fact that their interests and those of the landlord are not always the same.

“They get lulled into a false sense of security,” said Eric L. Nesbitt, a real estate attorney in Denver, and author of “Negotiating Commercial Property Leases.”

“They drive around, see names and numbers on signs on buildings, call and deal direct with the landlord rep,” he said. “They have a good rapport and think they’re getting a good deal. But, at the end of the day, that agent is going to get the best deal they can for the landlord.”

The tenant may think they got a break because the landlord’s rep took 50 cents or $1 off the lease rate as a concession, Nesbitt said. But, other tenants got $2 off.

Given the relatively weak demand and excess supply of commercial space, tenants should use that imbalance to their negotiating advantage. It’s still a tenant market in retail, depending on the area one is looking to lease in, said Walker Barnett, principal with Colliers International.

However, that is not true with industrial. With a 5 percent vacany level, the industrial market is swinging back toward the landlord, he said.

To fill empty space, many landlords are offering incentives that go beyond cutting the lease rate. Free rent, whether for one month or more, has become increasingly common.

Another example is a more generous allowance for tenant improvements. Landlords pay for improvements to get space ready for tenants up to a certain amount, say $10 per square foot. If the cost exceeds the allowance, the burden falls on the tenant to pay the difference.

By offering a bigger allowance, the landlord is shouldering more of the up-front cost.

Long before negotiating a new or renewal lease, tenants should know the financial health of the property owner.

That is one of the most overlooked aspects of a transaction and one that could come back to haunt the tenant if the landlord is foreclosed upon or does not make good on promises to do renovations or other improvements.

“You have to ask a lot of questions,” said David Zimmer, national president of the Society of Industrial and Office Realtors. “A lot is relative to the size and sophistication of the tenant and the deal. Some information will be readily available.”

Zimmer suggests asking the landlord’s lender for a reference. He also said tenants should insist on a nondisturbance agreement in the lease. Under this provision, the lender honors the landlord’s lease obligations if the landlord defaults on his loan.

A nondisturbance agreement trumps a common provision in leases indicating the lease is subordinate to the mortgage or deed of trust, Zimmer said.

Nesbitt and Zimmer both recommend businesses rely on a qualified tenant representative to find the space that fits their needs and negotiate the best lease.

There is no extra cost since a tenant’s representative splits the commission with the landlord’s broker, an arrangement similar to what happens in residential real estate.

“We like to tell our clients that in most cases, not only are we going to work with you, you are going to save more money than if you try to negotiate on your own,” Nesbitt said.

That is not to say business owners and managers cannot find space on their own, perform due diligence on the landlord, and successfully negotiate a lease.

“Is it possible? Of course,” said Frank Simpson, 2011 president of Certified Commercial Investment Member Institute.

“It’s possible for a lay person to operate on himself but you really need a surgeon to do it. Why would you not want to use a qualified broker? You’re busy. You’re selling widgets. You don’t know the pitfalls, you don’t know the opportunities that the market is allowing in this climate.”

Last Friday, the CCIM Gulf Coast Chapter held the 18th Annual CRE Forecast Competition. Here Clay & Company has summarized the days lectures for you.

Dr. Mark Dotzour, Chief Economist at the Real Estate Center at Texas A&M University, opened the competition with a report on the state of the national economy giving a positive outlook for the commercial real estate industry. Below are some of his key points.

• Every metro area in Texas is experiencing positive job growth this month and the private sector is ready to get back to work. Government layoffs are inevitable in the coming years, but the private sector’s willingness to hire should offset this.

• Banks need to clear their shadow inventory to bring normal values back to CRE. Thorough auditing and foreclosures of bank’s underperforming assets will help the nation in the long run. “Extend and pretend” practices need to stop. While it is unfortunate that many banks will go out of business, Dotzour sees new banks quickly taking their place.

• Look for Class A properties in large gateway cities to perform well; however, all other assets seem to be frozen. This is causing a “double bubble” effect in certain cities and inflated prices in Washington, New York, and San Francisco.

• In closing Dotzour stressed how important it is that the government show confidence this year and that banks stop solely buying treasuries.

Other area real estate experts were asked their opinions on the industrial, land, retail, office, and apartment sectors. Below we’ve broken down their predictions:

Industrial:

• Times are good for tenants with economical rental rates available; but with low vacancies and very little new construction, potential tenants are having a hard time finding the right property, especially on the north and west sides of town where very few crane-served buildings are on the market.

• Industrial cap rates are coming down: expect to see quality assets in the 7.5-8.5 cap range.

Land:

• Insiders predict midtown Houston land prices to remain high at $45-55/SF. Multi-family developers are purchasing land; currently there are 10 very large land deals in the Houston area set for apartment development, 6 of those inside the 610 loop.

• As housing is concerned, there’s only a 4-5 month land supply of quality lots in Houston.

• Interesting facts: Walmart paid $50/SF for the land between Washington Avenue and I-10, part of the new Washington Heights development by Ainbinder. Kroger recently paid $49/SF for the land to build their new store on Studemont.

Office:

• Insiders predict Class A, downtown office space will command rental rates between $34- $37/SF and sales will average $200-230/SF.

• Job growth was repeatedly stressed as the saving grace for the industry, and experts expect corporate management to finally make hiring decisions this year.

• Large nationwide firms perceive Houston to have office rents at below market rates, a favorable outlook for the city.

• To the investors out there: Don’t be looking for steals, because you won’t find any. Expect to pay market prices.

Retail:

• Service-oriented retail will weather this recession stronger than solely merchandize-driven stores because internet sales are hurting brick-and-mortar companies harder than you’d expect. Given this fact, companies looking to open additional stores need to tap into the opportunites that internet sales provide.

• Zip codes and shipping addresses of current customers are an invaluable asset for expanding chains.

• Similar to the industrial markets, rental rates will increase in 2011 with quality space hard to find.

• “Lifestyle” retail centers with the “right” tenant mix and well-conceived parking garages will see a comeback after the recessionary years; however, population densities are key to their success.

• Investors best bets: size matters, small grocery-anchored centers with stable tenants.

Apartments:

• Big life insurance companies will be prolific lenders in the 2011 multi-family markets but expect to pony up at least 60% equity for such deals.

• We should expect big buys from large institutional investors in core, inner-city markets and for smaller, private companies to acquire apartments in the suburbs.

• Panelists forecast a $1.25/SF rental rate in Class A properties with average market occupancy rates to hover near 88%.

Industry Trends from CCIM

Hospitality — Hampered by lack of construction financing, new hotel supply is projected at 1.7 percent for 2010 and 1.3 percent annually for 2011 and 2012, according to Lodging Econometrics. The modest increases will aid hospitality’s recovery, allowing rents to rise as demand increases with the improving economy.

Industrial — Net demand for warehouse and flex space registered at 6 million sf in 2Q10, the first increase since 4Q08, says Cassidy Turley. Thirty-five of 67 major metros registered positive demand, compared with only 11 markets in 1Q10.

Multifamily — The number of occupied apartments increased by 215,000 units in the first half of 2010, almost double the increase of 110,000 units for all of 2009, according to MPF Research.

Office — Off-campus urgent care and community clinics will represent a larger portion of medical office development in the coming decade as hospitals look for more cost-effective ways to handle routine patient care, according to Cushman & Wakefield’s 2010 Medical Office Building Investor Survey.

Retail — Excluding mega stores such as Wal-Mart and Target, retailers plan to open 65,291 stores over the next 24 months, according to RBC Capital Markets and Retail Lease Trac data. Quiznos, Dollar General, Anytime Fitness, and Five Guys Famous Burgers plan to add the most new outlets.

The city is negotiating a deal with the developer of Washington Heights — a proposed Wal-Mart-anchored shopping center near Interstate 10 and Yale – that would reimburse the local builder for as much as $6 million in public infrastructure improvements.

If the agreement is approved, developer Ainbinder Co. would widen and repave streets surrounding the project, refurbish bridges near the site, develop a bike and pedestrian trail along a stretch of Heights Boulevard south of I-10 and improve underground drainage, among other upgrades.

The improvements are expected to ease traffic congestion as well as prime the area for other future developments, the developer said.

Many Heights residents have opposed the plan since they learned of it in early July. On Wednesday night, they continued to voice their concerns about a development they feel is incompatible with their neighborhood.

About 500 people attended a public hearing called by Mayor Annise Parker at the George R. Brown Convention Center. About a quarter of those in attendance wore red, as a sign of opposition.

More at chron.com

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