"I learned that IHOP is not the place to order fish" - Larry David

“I learned that IHOP is not the place to order fish” – Larry David

Uh oh. I just read the latest Cushman & Wakefield US office market report and I think we got a little ahead of ourselves in calling the real estate depression of the last five years completely over. So, apparently, did landlords who are trying to float major increases in asking rents. I’m a positive guy, and I’m positive that landlords have unrealistic pricing expectations in some US markets as they attempt to score rate increases.

The industry’s prognosticators (including yours truly) forecasted that a swing back to a landlord-favored market was under way.  After almost five years of beating on landlords in every way possible, it seemed they were finally going to gain some leverage. Tenants have reigned supreme for so long, it almost felt unsporting at times during the past several years.

In fairness, it did seem like the ship was turning. Leasing in 2011 was up significantly over 2010. Lenders began lending again, and many executives at large space users had a pep in their step as companies reported robust profits.

All this excitement and talk of recovery clearly fanned the passions of the downtrodden landlord community. According to a press release accompanying the C&W office numbers, “Rental rates…remained resilient.” “Overall US Office rental rates averaged… the biggest annual increase since 2008.” 

But hold on to your horses. New leasing activity dramatically slowed in the first half of the year, declining almost 10 percent in the second quarter, reports C&W. Over eighty percent of the major Central Business District (CBD) markets reported a slow down in leasing activity.

Stuck In The Mud

Yes, I saw Friday’s Bureau of Labor Statistics Report. In July, we added 163,000 jobs, which is the largest gain in five months, but the unemployment rate is at its highest level since February. Since the bottom in Febuary of 2010, the US economy added about 4 million jobs, or just under half the 8.7 million jobs that were lost. We're about half way home.

Fed Chairman Bernanke on July 17th testified in a Senate panel that our economy is “stuck in the mud.” “It appears that the main impediment to stronger employment growth is uncertainty” says Cushman & Wakefield Senior Economist Ken McCarthy. Consumers and business alike are worried about the European debt crisis, the upcoming election, and uncertainty related to taxes, to name a few issues. There’s lots of handwringing going on in America’s boardrooms and at consumer's kitchen tables.

In addition, Kiplinger latest economic outlook forecasts that the US economy will turn up a bit in Q3 and Q4 of this year, but “it will be another disappointing year of slow GDP growth, capping the worst three years of economic growth, outside of a recession, since records begin in 1930.” The publication goes on to say that this is “evidence that the U.S. is still struggling to leave behind the effects of the biggest financial crisis since the Great Crash of 1929.”

Location, Location….    

Yes, the old saw about commercial real estate and location is still true. Rates are deservedly going up in Silicon Valley in California and Silicon Alley in New York. In fact, Northern California and the “energy belt” of Houston and Dallas are seeing real recovery. Demand is up and supply is down.

However, the same logic holds true in Cincinnati, Cleveland and Detroit. They have persistently high vacancy and low growth in employment. Supply exists for as far as the eye can see.

Southern cities like Atlanta, Charlotte and Orlando fall somewhere in the middle. They are experiencing activity from tenants moving, but in many cases those are simply pieces moving around the chessboard. The tenants are moving from location A to location B with little or no growth in their space needs. They are simply taking advantage of the opportunity to lower their real estate costs.

What to do?

A basic tenant of negotiations is to have all the information you can about the deal. Before you and your broker go to a meeting with a landlord and discuss your potential multi-million dollar lease commitment, have a good grasp of the market. I’m not just talking about vacancy statistics either; you should have a solid understanding of the current employment statistics and overall economic condition of your community. The landlord may be an expert in real estate rates, but you, the amateur economis,t can use fear, uncertainty and doubt against all the rosy arguments for higher rates.

The landlord’s leasing agent will smile and talk of how many companies are growing in your community and how little space he has left. But perhaps you, armed with the facts on the economy, can put on your best Larry David face and say “What are you, CRAZY?”

Note: I looked hard for a Larry David YouTube clip that would fall into the "G" rated category to no avail. I'm not sure such a thing exists. Here's a really well done and funny speech that Mr. David gave in Las Vegas in 2005. I'd rate this "PG13" for the easily offended. Enjoy.

Posted August 6th, 2012