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Commercial Real Estate Rental Rates Fall As Landlords Struggle To Keep Tenants

Posted By admin || 4-Mar-2009

According to article in the Dallas Morning News, commercial real estate landlords are working hard to hold on to tenants as commercial real estate rental rates plunge and vacancies soar.

The article said:

It's happening across all areas of commercial real estate - from retail and office to warehouse and manufacturing space. Locally based retailers such as Pier 1 Imports Inc. and Rent-A-Center Inc. have said they're looking at rent reductions or terminations on leases for hundreds of stores.

"Everyone out there is trying to cut costs, and typically the rental cost is second to people," said Larry Toon, who represents large office tenants for Jones Lang LaSalle in Dallas. "It makes sense for the landlords to try to settle this early."

Some tenants are even using bankruptcy as leverage to demand lower rents. As many companies restructure in bankruptcy they are implementing job losses and less people means they need less space.

"There's too much space coming on the market, and there are layoffs," said Matt Heidelbaugh, an office broker for Cushman & Wakefield of Texas. "Job growth drives our business, let's face it."

And it is job growth that is shrinking rapidly as more job losses and bankruptcies hit the retail, industrial and office markets. Office vacancies are at 20 percent which is creating an environment where businesses can renegotiate rental rates and even the terms of their leases. But the real question is how much of a decrease can landlords afford to make? Some landlords are cutting rents as much as 75 percent; but is that sustainable? At what point do the high vacancy rates and lower rents drive the landlords into bankruptcy? During the boom times, many in commercial real estate began to operate in a way that used most of their cash and many are highly leveraged. With a downturn, the combination of low cash and high leverage is a recipe for bankruptcy.

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