Wednesday, February 11, 2009

A Modest Suggestion to Landlords

Posted by: Chris Shanks
Investment Analyst

Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.

In these difficult times it is important to realize that everyone is feeling the financial burden of the real estate market crunch. Many tenants are being forced out of their space because their reserves and revenues aren’t large enough to pay for their in place leases. As a landlord you should make it as affordable as possible to keep these companies in your building. Many of them will bounce back with the economy and will once again be able to pay a market rental rate. The reason I stress the importance of tenant securitization, is that the lease-up period for vacant space is getting longer and longer. If you, as an owner, need to sell your building within the next few years you are going to be much better off having a building that has tenants, even if lease rates are below “market”, rather than one with vacancy. It was said two years ago, that buildings were worth more vacant than occupied due to the wild speculation of lease up assumptions that were ever present in those times. In today’s market one could argue the exact opposite; buyer confidence has reached such a low point that almost any vacancy is causing them to unfairly discount high quality real estate assets. This causes me to stress again the importance of keeping warm bodies in your buildings. Even if tenants are merely covering operating expenses and debt service, it is a better alternative than foreclosure. Also, having tenants in your building will suppress some of the conservatism of buyer’s lease up assumptions. Higher occupancy will equate to a fairer sales price.

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