These are challenging times for all. In the commercial real estate market, it has proven to be very challenging. We have noticed that few users are active in the market and those few who are, know that it is either a tenant’s or buyer’s market. Taking advantage of such leverage, rent concessions are frequently requested and they are met by the landlord.
These days, it is also not uncommon for the tenant or purchaser to ask for follow-up concessions such as fit-up allowance, free rent or low purchase prices – knowing that the market remains soft and that the landlord/seller has few alternatives.
Rent concessions of 15 to 20% from prices three years ago are not uncommon. Shorter lease terms are also frequently negotiated because tenants want to limit their financial exposure. They are mindful that lease rates may continue to fall or that business activity may erode more, forcing further right-sizing.
The sales slowdown of commercial properties is further exacerbated by the limited appetite of lenders and more stringent underwriting criteria. Landlords and sellers need to re-evaluate their strategies in this new environment. For instance, a tenant’s insistence on a short term lease may benefit the owner if the market recovers and rental rates rise. On the sale side, it may be wiser to take a lower price if the buyer can close before the end of the year, when the capital gains tax code may expire.
For more information, contact Tom Dunham at 207-773-7100.
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