Summary
As property and portfolio budgets are being revisited and solutions to cash flow problems considered, Commercial Real Estate owners are faced with difficult challenges.
Having to give a property back to the bank is a terrible decision to have to make. Alternative solutions include cash calls from partners and even deciding to not actively market space unless tenant's can take the space "as is" at reasonable rental rates i.e. "moth-balling" space.
The last chapter has yet to be written.
Analysis
Consider this example that is occurring across the nation.
A property owner has maintained their property, purchased wisely and up until this point have had a healthy investment which rendered their desired return on investment. In today's economy tenant relations are important and in order to maintain the status quo they start to visit with existing tenants to facilitate early renewals.
While some tenants are easy renewals, others negotiate lower rents, improvement allowances and renegotiate existing lease terms. Already, while trying to do something proactive, the landlord's net operating income is starting to take a hit, just to maintain stability.
Meanwhile their leasing agent is working hard to attract new tenants for the vacancies, in markets where free rent, moving allowances, bonus leasing commissions and deep rental discounts are prevalent. Not to mention a marked absence of prospective tenants.
We are approaching the end of the year and many owners are revisiting budgets and lines of credits with banks. The lines of credit is the lifeline some owners are depending upon to pay for capital necessary to lease up the building and perhaps retain existing tenants.
Unfortunately some banks are pulling lines of credit. Without this or other sources of capital, owners are having to make some hard decisions.
If they lease their vacancies the required capital will trigger a cash call in some cases several hundred thousand dollars up to over a million, depending on the property. While this investment buys them an income stream they do not have now; are the partners of the ownership in the position to make cash calls of this magnitude?
Alternatively, if the existing cash flow meets basic operating requirements, debt service, real estate taxes and some minor capital expenses; some owners are seriously considering taking their existing vacancies off the market. A cash call of $10,000 per partner is easier to facilitate that $100,000 per partner. These owners are banking on a stabilized commercial real estate market sooner than later. This "moth-balling" of vacant space is more apt to occur when the debt on the property has a longer term and the partners believe they can maintain a status quo with existing tenants only.
While other landlords with deeper pockets in some markets are discounting rates and granting greater concessions; those spaces are being leased up. Meanwhile a prudent owner with "mothballed" space would not turn down a tenant willing to lease space "as is". They are just marketing their vacancies differently.
In the 1980's some markets experienced "moth-balled" vacancies. Those markets did recover and the owners did retain their assets. However, many seasoned commercial real estate professionals admit that the current conditions are not the same and there are more outside influences making an impact on commercial real estate and its value.
In conclusion, "moth-balling" space requires a crystal ball. If commercial real estate has yet to hit bottom, as many believe; space which is moth-balled today could have been leased at a higher rent. The value of the asset would have been preserved. However, if there is an absence of cash to facilitate the lease-up, it is a moot point.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
