Fannie Mae led the way this week in its Monthly Economics and Mortgage Markets Outlook.

“While we expect the meager recovery to continue into a third year, we have downgraded our outlook substantially for the rest of this year and next. For all of 2011, economic growth is expected to downshift to 1.4% from 3.1% in 2010-nearly a full percentage point lower than our projection in the prior forecast.”

“Growth is expected to pick up in 2012, but only to about 2%, compared with 3.1% projected in the July forecast. This downgrade reflects a substantial risk of recession in coming quarters,” Fannie Mae wrote. “The sluggish pace of economic growth implies that the economy is vulnerable to additional shocks, especially the renewed concerns about the European sovereign debt crisis.”

Lower mortgage rates are not expected to boost housing demand, which will likely remain sluggish until we see sustained, strong employment gains, Fannie Mae wrote.

“With modest improvement in home sales in 2012 and only a gradual improvement in inventory, we expect home prices to resume their declines in the second half of 2011 before stabilizing in early 2012,” Fannie Mae said. “There is some risk that the stabilization in home prices will be delayed if the labor markets deteriorate further.”

Freddie Mac, wasn’t nearly as downbeat as its counterpart, and said this week that the likelihood of an extended period of both relatively low short- and long-term interest rates is helpful news for the housing market’s recovery.

“While the capital markets have experienced sizeable movements up and down in recent weeks, these swings are unlikely to lead to whiplash or hospitalization for individual investors,” said Frank Nothaft, Freddie Mac, vice president and chief economist. “Heightened uncertainty, unfortunately, can be harmful to the overall economy. Perhaps it’s best not to look up or down, but keep one’s eyes on the track ahead.”

While the first half of the year saw a budding commercial real estate recovery, the downbeat news this summer is also threatening to delay that progress, accounting consultancy firm Deloitte wrote in a commercial real estate outlook it published this week.

With the economy unlikely to be a short-term catalyst, strategies based on more realistic expectations of a modest and gradual return to growth are key, said Bob O’Brien, Deloitte vice chairman and real estate sector leader.

“It’s important to remember that commercial real estate was the first sector to be hit hard by the downturn so it is further along in rebounding than other businesses,” O’Brien said. “At the same time, the wall of debt maturity that will come due between now and 2015 still may present short- and longer-term challenges for the remainder of this year and into 2012.”

Christopher Lee, president and CEO of real estate consulting firm CEL & Associates, wrote this week that the prospects for a real estate recovery could wait until 2013.

“Life isn’t about waiting for the storm to pass… it is about learning to dance in the rain,” Lee wrote this week in his Strategic Advantage newsletter. “We are in a perfect storm of financial and economic turmoil and chaos that continues to create challenges for the country and the real estate industry.”

According to Jones Lang LaSalle’s Global Capital Flows report that also came out this week, cross-border commercial real estate transactions rose 50% to comprise half of the $103.5 billion of direct investment transactions completed in the second quarter of 2011,

Given the strong start to the year, Jones Lang LaSalle said it still expects market volumes to reach its full year forecast of $440 billion, so long as current market volatility and uncertainty abates and there are no further significant economic setbacks.

In an era of instability, good quality commercial property will benefit, but deals, particularly larger ones, will take longer to complete, JLL said.

“In the first half of this year, we saw firms investing domestically and the private equity and unlisted funds investing across borders,” said Arthur de Haast, head of the International Capital Group at Jones Lang LaSalle. “Funds are being more cautious with a focus on investing primarily at home and trusting experienced managers with their cross border investments. This trend should continue through the second half of the year if the economic environment remains uncertain.”

“Risk aversion has risen over the past few months, meaning large deals are taking longer to close,” de Haast added. “While we’re seeing more transaction flow, in the second quarter there was a notable absence of big ticket, single-asset transactions.”

“While a significant number of large transactions are in the pipeline for the second half, the volatility of markets could cause further delay” de Haast said.

News: National CoStar Analysis Finds Investment-Grade Property Prices Moved Up 5.46% in the Third Quarter

Investment grade real estate continued its positive trend from August with a strong 5.48% increase in September, according to CoStar Group’s newly released Commercial Repeat-Sale Indices (CCRSI).

Also, for the first time since the second quarter of 2007, all four primary property types within the commercial real estate repeat sales index (office, retail, industrial and multifamily) showed an increase in pricing in the third quarter.

The CoStar investment grade real estate index remains down 4.89% from the same period last year, and down 29.08% from two years ago. However, for the third quarter, the investment grade real estate index increased 5.46%. This is a significant reversal from the previous quarter, as the investment grade real estate index was down 3.24%. The CoStar investment grade index is therefore showing positive price movement quarter over quarter.

The CCRSI October report is based on data through the end of September, 2010. In September, 574 pair sales were recorded compared to 611 sales pairs from August. Typically CoStar receives additional data that adds a few percent to the numbers from 2 months ago and up to 12% more data from one month ago, so it appears that sales volumes are stable.

This volume is up from a year ago in September when the CCRSI saw 513 sales pairs. The general volume appears down while the investment grade sales volume was up for the month.

Overall, there has been an upward trend in pair volume going back to 2009. January 2009 appears to have been the low point in the downturn in terms of pair volume, when 376 transactions were recorded. Since then, pair dollar volume has increased overall and the average deal sizes for both general and investment grade have increased.

CoStar’s index is the only repeat sales index that also tracks commercial real estate transaction prices less than $2.5 million. The CoStar index that takes into account all property sales, including those less than $2.5 million, is referred to as the general commercial real estate index.

The general commercial real estate index continued its quarter to quarter fluctuations, most recently reversing the negative price trends from the second quarter and turning positive once again in the third quarter.

In the third quarter, general commercial real estate index increased 2.29% for the quarter with a positive 3.68% increase for the month of September. The general real estate index is down 7.38% from a year ago and down 20.99% from two years ago. However the general commercial real estate index has shown less volatility than the investment grade property index.

In the past quarter, of the four major CRE categories, the US multifamily index moved up the most with a positive 8.98% increase, with the office index increasing 6.08%, followed by the retail index increasing 5.56%. The industrial index remained mostly flat with a slight increase of 0.49% for the quarter. The increase in retail property represents a huge reversal of prior trends in that category, but retail property is still down 8.25% from a year ago.

Most of the top 10 markets moved in the same direction as the property category trends showing the current capital appetite preference for larger markets. The index for the top 10 office markets was up 13.37% for the quarter, the index for the top 10 multifamily markets was up 7.91% and the index for the top 10 retail markets was up 5.61%, but the index for the top 10 industrial markets was down 9.17%, suggesting the larger industrial markets are seeing more distress than the smaller industrial markets.

Sales transaction dollar volumes used to calculate our September indices were up slightly for investment grade and were stable for general commercial real estate. Overall transaction and dollar volumes were up slightly for the month of September.

Distress continues to be a significant factor in the index results. Since 2007, the ratio of distressed sales to overall sales has increased from approximately 1% of overall sales to approximately 22% currently.

Courtesy of CoStar Realty Information, Inc., written by Mark Heschmeyer, November 03, 2010

Copyright (c) 2010 CoStar Realty Information, Inc. All rights reserved.

We can get you a great deal because we have a relationship with the landlord.

If your company has the creditworthiness which suggests you can meet your lease obligations, then any landlord would love to have you as a tenant.  The suggestion that you need some kind of “in” to do a deal is ridiculous.  Landlords need the paying tenants.  A Tenant Rep will represent your interests – not the interests of some landlord with whom they have a relationship or hope to build one.  This is because many leases offer blatantly anti-tenant terms, some buildings have a high level of tenant dissatisfaction, some landlords routinely violate lease terms, and there are landlords whose financial troubles could impair their ability to perform as provided in a lease.  When a broker entices you with claims of a special relationship with the landlord, you must ask whether such a relationship is consistent with an obligation to represent you.  Will such a broker be free to offer full disclosure of all costs in a proposed lease?  How about management practices that will affect you?  Will a landlord broker be able to negotiate forcefully on your behalf if this means opposing a landlord from whom they hope to gain lucrative agency business?  Of course, you want lease negotiations that are conducted amicably.  This means insisting upon a professional approach, not trying to buy goodwill.

We can get you the best deal because we know the market.

Bad leases are signed not because a tenant misses a great space but because the leases are poorly negotiated.  All brokers have access to available space.  Landlords and their brokers let everybody know about availabilities directly, through frequent mailings, as well as through real estate databases which brokers subscribe to.  Leases go wrong because costs soar higher than bargained for, because the leases didn’t stipulate adequate performance standards for a landlord’s performance in such areas as heating, ventilating, air conditioning, electricity and other services, because leases restricted a company’s flexibility, imposed costs beyond those bargained for, and many other reasons – every one of which arise from the way the lease was negotiated.  A badly negotiated lease often turns a “great space” into a bad deal.

We can provide great service because we have a lot of branch offices.

One doesn’t need branch offices to identify spaces in another city, because landlords list their availabilities through brokerage networks and databases.  Landlords want everybody to know about what they have, so they can start getting revenue as quickly as possible.  If branch offices are serving landlords, then they face a serious conflict of interest in their ability to protect you.  After all, every landlord is a current client or a prospective client, and aggressively protecting tenants jeopardizes lucrative landlord business.  The key to signing a good lease is having good site analysis, good lease analysis, good lease negotiation and good follow-up.  These depend on the caliber of the Tenant Representative, not the location of their offices.

Don’t rock the boat and upset the landlord.

Landlord brokers often advise tenants not to negotiate aggressively, not to demand that landlords comply with lease terms and, once a lease is signed, not to insist on the rights provided in the tenant’s lease.  Some tenants seem to be afraid a hostile landlord might become more difficult to deal with.  Yet in our experience, landlords respect tenants who know their rights and pursue their interests in a business-like way.  While it’s true a tenant often needs a landlord’s cooperation, it’s also true a landlord needs a tenant to help pay the mortgage, and it’s generally cheaper to keep a current tenant satisfied than to incur the cost and possibly lost income resulting from a dissatisfied tenant moving out.

Hurry up and get the deal done.

More than anything else, landlord brokers push tenants to get a deal done.  These brokers will tell tenants that if they don’t quickly commit to a space, somebody else will take it. Such pressure is especially intense in a “hot” market favoring landlords.   Hurrying into a deal risks neglecting comprehensive due diligence, overlooking costly drawbacks in a building, failing to properly analyze the risks and total costs of a landlord’s draft lease – and signing up for a transaction which can become a serious liability to your company.

Since you’re such a big tenant, you have very few alternatives.

Some of the worst leases have been signed by big companies probably because top executives felt they had to be in a particular building.  While it’s true the number of large spaces in a particular area is limited at any point in time, this definitely doesn’t mean big tenants must accept whatever terms landlords care to offer.  Getting a good deal, however, means big tenants must gain every possible bargaining advantage.  Tenants must have a representative serving tenants exclusively – and not the interests of landlords.  It’s critically important for a large space user to start the site search early.  A million square foot tenant should start at least five years before lease expiration.  Starting early means you’ll be able to see more spaces and include options that require building from scratch as well as different options for leasing vs. owning.  There are almost always more alternatives for large space users than you might imagine, including existing buildings in the same area that can be repositioned, buildings in a different area once considered off limits, and build-to-suits.  By developing viable alternatives, objectively analyzed in detail, you will understand your true costs and trade-offs.  Only with this background can you know if a premium is being demanded for the solution you prefer, and whether it is a premium you think is worth paying.  Equally important, all this means you’ll be able to pursue preliminary negotiations, and if they don’t lead to satisfactory terms, you’ll have time to walk away and begin negotiations elsewhere.

The landlord’s draft lease is boilerplate, standard terms.

So-called “Standard terms” invariably mean pro-landlord terms because leases are drafted by landlords which are naturally protecting their interests.  You wouldn’t expect them to do otherwise.  “Standard terms” often includes tenant budget destroyers like operating expense loopholes, mark-ups, vague landlord performance standards and no audit rights.  Don’t be pressured into accepting “standard terms.”  A lease negotiation should be driven by your business objectives, not by a landlord’s desire to avoid risk (and pass it on to tenants like you).    Your business needs must be translated into lease terms to be secured during negotiations.

Just focus on rent and the workletter.  Let the landlord’s lawyer take care of the fine print.

Many corporate executives imagine they’ve locked in their biggest costs by shaking hands on these two terms.  However, the rest of the lease is loaded with costs.  There significant non-rent costs in a typical lease, many hidden, and it’s contrary to the interests of landlord brokers to identify these costs – or do anything else that might jeopardize a deal.  Landlord lawyers don’t provide complete protection for tenants because they aren’t trained to analyze, nor have hands-on experience with, business issues which are responsible for so many excessive lease costs.  Landlord lawyers don’t claim to know how desirable or undesirable a landlord draft lease is from the standpoint of the current real estate market.  They aren’t experts on the economics of building operating systems.  They aren’t expected to know how various ways of charging for electricity will affect costs.  They don’t audit landlord billings, so they don’t see whether particular landlords honor or evade lease terms – and what must be done about it.  Landlord lawyers typically review a lease without ever visiting the building and many problems are missed because a lease didn’t address certain things which must be seen to be appreciated – or avoided, as the case may be.  It is imperative to have a Tenant focused lawyer on your team.

Overall, the most common reason tenants seem to take bad advice from landlord brokers is that they’re impressed by the big deals such brokers have done.  But as talking points, big deals are meaningless unless they’re good deals for tenants.

A tenant is supposed to pay operating expenses, the cost of operating the building they’re in, but not the landlord’s overhead which includes, for instance, the cost of developing and managing other buildings a landlord owns.  Yet in this seemingly simple clause, the Fortune 500 Company we’re discreetly calling “XCORP” has agreed to pay the landlord’s overhead.

FF. “Management Fee” shall mean with respect to any work performed or services rendered by Landlord on behalf of or at the request of Tenant. An amount equal to ten percent (10%) plus ten percent (10%) of Landlord’s cost of such performance to cover Landlord’s additional overhead and administrative costs and expenses arising out of such performance.

It doesn’t matter how much a brokerage firm knows about the real estate market if it can’t negotiate a great lease for a tenant.  A badly-negotiated lease can easily cancel out the advantages of a great location — and even imperil a business.

Take a company which we’ll refer to as XCORP which signed a lease in one of Manhattan’s most prestigious Class A office buildings with a skyline signature.  The lease locked in a low base rent for 15 years.  The corporate executive who signed the lease had much prior real estate experience.  The lease was a major cost of the company.

The company had the advantage of shopping for space during a down market when some of the most famous landlords like Donald Trump and the Reichmann brothers lost control of their properties to banks.

Yet XCORP’s lease costs soon climbed ominously.  Moreover, when the real estate market became hot, XCORP’s top executives were shocked to learn the lease permitted the landlord to evict them (I am currently working with a retailer where the prospective Landlord has buried three opportunities to kick out the tenant whenever they want), and suddenly they faced the prospect of having to struggle with even higher occupancy costs.

Here are the most important issues and costly lease traps in the XCORP lease — issues and traps which occur in plenty of Fortune 500 leases:

1. Operating expenses. As is the case with most contemporary leases, the tenant agreed to pay a portion of the landlord’s operating expenses.  Operating expenses are commonly understood to be the normal cost of operating a building.  They are not intended to cover improvements to the building, costs of attracting new tenants, landlord’s corporate overhead and other costs not directly related to building operations.

Operating expense provisions, however, are frequently used by a landlord as a hidden profit center.  Hidden because their dollar significance is not disclosed to the tenant when a lease is signed, and the methods landlords use to increase operating expenses are often less than straightforward at best.

XCORP agreed to one of the worst operating expenses provisions I have seen.  It practically gives the landlord a blank check.

For instance, XCORP agreed to pay a management fee (for the landlord’s in-house management services) that is “consistent with Landlord’s standard practices”.  This means if the landlord bills a management fee that is 300% or 500% or 1000% higher than its cost or the prevailing market rate or any other objective standard, XCORP as a tenant is still obligated to pay that fee under the lease.

Although XCORP’s lease seemed to define what may be billed as operating expenses, and listed specific exclusions, XCORP accepted lease language stating the landlord’s actual operating expenses, “are intended to constitute a formula for an agreed rental escalation and the computation may or may not constitute an actual reimbursement to Landlord for costs and expenses paid by Landlord in connection with the [Building].”  While such language is appropriate for lease with a porter’s wage, CPI or other indexed escalation, it backfires and becomes a landlord’s sword instead of a tenant’s shield in this situation.

XCORP agreed to let the landlord bill “capital expenditures which under generally applied real estate practice are expensed or regarded as deferred expenses and…capital expenditures made by reason of Insurance Requirements or Legal Requirements…”

Sounds legit, like the well-known Generally Accepted Accounting Principles (GAAP).  But try asking for documentation on “generally accepted real estate practice.”  There isn’t any such thing.  No documentation whatsoever.

Furthermore, accountants will tell you that “deferred expense” is another term for capital expenditure.  In essence, XCORP’s lease says that capital expenditures were excluded from operating expenses unless they are generally regarded as deferred expenses like capital expenditures.

Since the obvious intention was to bill tenants for capital expenditures, naturally the landlord sought to prevent XCORP from challenging the bills.  Incredibly, XCORP executives agreed that if they fail to challenge the landlord’s annual operating expense statement within 30 days, they forever waive their right to do so.  They have simultaneously agreed that the landlord has an unlimited amount of time to render operating expense statements, and that having once rendered an annual statement, they may revise it as many times as they see fit.

This means XCORP could be hit with operating expenses years after they were supposedly incurred.  Some tenants have renewed leases only to see their escalations jump because of unexpected landlord bills from their previous lease term.

2. Electricity. Costs of electricity frequently exceed 10% of base rent and can be significantly more.  It’s no wonder when you consider that most tenants in office high-rises cannot get to their premises, and in a sealed building, cannot comfortably breathe without electrically powered elevators, heating, ventilating and air conditioning systems.  Then there are the need for electricity to power lights, computers and other kinds of office equipment.  A properly-negotiated lease provides controls for electricity costs.

Yet XCORP executives signed a lease which didn’t specify how much electricity was to be provided and which left electricity costs wide open.  As their lease put it, electricity would be at the “Landlord’s sole option and at Tenant’s sole cost and expense…”   There’s no limit to electricity costs.  Moreover, the landlord could decide to install a new metering system which XCORP would pay for.  The cost is in no way limited, it’s not required to be amortized, can be billed in a lump sum, and is not required to be allocated among other tenants who may also be similarly metered.

3. Audit rights. To maintain prudent financial controls, corporate executives must be able to verify the legitimacy of expenses — especially significant expenses such as occupancy costs.  This is to guard against human error, bad judgment and occasional dishonesty.

Incredibly, XCORP — which pays thousands of dollars of escalation charges per month — did not reserve a right to audit the landlord’s books and records to determine if billings were properly computed in accordance with the terms of the lease.  While XCORP probably could gain access through either litigation or arbitration, doing so would likely involve substantial time and cost.  This in itself would deter many tenants from determining whether they are being overcharged.

XCORP executives also agreed that if the landlord has overcharged them on operating expenses, after they have spent the money to prove this overcharge through an audit and arbitration, the landlord has his option of deciding whether to give XCORP a credit or make a refund, how long a refund might be stretched out.  And of course, XCORP isn’t entitled to any interest on overcharges.

4. Liabilities of building ownership. As a way to cushion the risks of property ownership and spread costs, many landlords seek to have tenants bear costs, especially capital costs which arise from so-called legal or insurance requirements.  Tenants who agree to bear any portion of such costs should certainly limit their financial liability to legal requirements arising specifically because of something they do.

XCORP accepted these liabilities of building ownership.  Consequently, XCORP could be hit with costs, imposed by law, that don’t even relate to their leased space.  They could be forced to pay for costs of common areas and the building generally.

5. Cost of repairs. It’s customary for tenants to pay the cost of normal repairs to their own space.

XCORP’s landlord demanded much more, and the company’s executives seem to have given the landlord everything.  For instance, XCORP’s executives agreed that whenever the landlord must make repairs, the company will pay the landlord its full cost, plus a 21% mark-up.

Many landlords demand the right to enter a tenant’s space to repair it and perform work affecting other spaces.  Well-advised tenants can oblige the landlord to minimize interference with tenant operations and reduce rent when the space they lease is reduced because of the landlord’s activities.

But XCORP agreed the landlord can install and maintain in their leased space unlimited ducts, conduits, chases, and other equipment related to the mechanical, structural, security, building management systems — all without any compensation to XCORP for interfering with their operations or diminishing their rentable area.

Understand that work on a building’s systems is frequent, noisy and dirty.  Moving workmen and equipment in and out is hard on walls, carpeting and more.  Columns that get “boxed out” to accommodate additional electrical risers, plumbing chases and the like make space smaller, less attractive and less useful.  XCORP agreed to take on all these problems with no remedy.

6. Heating, ventilating & air conditioning costs. Under the terms of this lease, the landlord has agreed to provide base building systems, and has given XCORP the right to install supplementary systems.  This is a fairly customary arrangement.  XCORP has agreed to pay all charges for HVAC services; such an arrangement can be entirely satisfactory, depending on what other charges are billed to the tenant and how this concept is implemented.

XCORP has virtually assured itself problems by agreeing that any bill for HVAC the landlord renders will be conclusive and binding — not subject to further question or challenge — unless within 30 days after receiving the bill, the “Tenant shall demonstrate, in writing, to Landlord’s satisfaction, that the calculations of the charges set forth in such bill are incorrect specifying the particular respects in which such calculations are claimed to be incorrect.”  No outside review or evaluation is provided for.  The landlord alone decides.

Moreover, how is XCORP, within 30 days, to provide a challenge to the landlord’s particular practices, when it does not have access to the landlord’s books and records, the engineering specifications, details of staffing, other tenants’ usage, and a dozen other factors which affect the proper billing of HVAC charges?  Standard and supplemental HVAC charges for even modest tenants readily exceed several hundred thousand dollars per year, but this tenant has no apparent way to get the information necessary to monitor these charges; and no effective way to challenge, since the landlord is both perpetrator and judge.  Yet, this lease was signed by an experienced tenant who fully understands the importance of controlling occupancy costs.

7. Cleaning services. Standard cleaning costs are often included in base rent and operating expense increases which a tenant has agreed to pay.

XCORP and the landlord separated cleaning costs from other operating expenses, and XCORP agreed to have the landlord retain contractors and bill for the service.

The lease permits the landlord to own the contractors, which almost always means above-market rates for tenants who are a captive market.

In addition, XCORP agreed to pay a 21% management fee!

No tenant benefit in any of this.

8. Notice provisions. These are likely to be little-read, but they can be critical to a tenant’s financial liability.  For instance, a notice containing an annual operating expense statement, or a notice of a requirement imposed by law that the tenant will be obligated to pay for.  Certain procedures should be followed to assure that such notices go to an individual with responsibility to take appropriate action.

XCORP’s executives accepted pro-landlord notice provisions which leave the company vulnerable to substantial liabilities.  The lease says that any XCORP notices for the landlord must be sent certified or registered mail and delivered to three persons: the landlord’s executive vice president, counsel and managing attorney.  By contrast, the lease says that landlord notices to XCORP may be delivered personally, with no proof of receipt required, and such notices may be left with anyone at the premises, including a temp, who probably has no idea how XCORP could be penalized if a notice is misplaced.

9. Tricky definitions. Leases commonly define key terms used throughout the lease.  This is boring stuff with immense implications.

XCORP’s lease defined terms to twist customary meaning and set up XCORP for unexpected liabilities.  For instance, page 13 of XCORP’s lease says the landlord may bill XCORP for “repairs” of equipment.  “Repairs,” according to the accounting profession and most lay people, are different from “replacements.”  But on page 61 the lease defines “repairs” to include “replacements” and a variety of additional work not customarily understood by the term “repairs.”

The landlord also stipulates that XCORP’s every “covenant” is also a “condition.”  How does this bit of language play affect XCORP’s financial obligations?  The landlord is saying here that XCORP’s exact observance of every promise, no matter how trivial, from putting down the blinds on a sunny day, to cleaning its premises in a manner satisfactory to the landlord, to paying the rent, is a condition that precedes any obligation the landlord might have to make even essential repairs or provide critical services.  Far from a necessary protection for the landlord, this is a classic hold-up, used to extract mid-term concessions from an unwary tenant.

A great lease negotiator is essential
if your company is to gain the advantages
of a great location

Here we have a lease agreed to by an experienced tenant in a prestigious Class A office building during a major real estate market downturn, when good deals for tenants are supposed to be a piece of cake.

Like most corporate real estate executives, XCORP’s executives focused on a few conspicuous terms expressed in dollars, particularly base rent and work letter.  Apparently XCORP’s executives treated the rest of the lease as “standard fine print” which somebody else (their lawyers) would look over.

After having signed a 15-year lease, XCORP’s executives were shocked to find that “standard fine print” concealed traps which approached the cost of rent and undermine their company’s competitive position myriad ways.  XCORP’s lease obliged the company to pay exorbitant and in some cases unlimited operating expenses.  Often performance standards for the landlord were too vague to be meaningful.  XCORP had no right to understand the basis for any landlord bills in a timely way.  They were limited in their ability to challenge these bills.

XCORP’s lease called charges for electricity, HVAC, the various management fees and so on “Additional Rent.”  Failure to pay “Additional Rent” is as serious as failing to pay base rent.  XCORP agreed the landlord could levy serious penalties and evict them for non?payment if the situation continued for more than a few days.

The result of all this, as noted, was that total occupancy costs soared far beyond what XCORP’s executives had anticipated.  Because they were caught unprepared, the lease costs threw off their strategic plans.  Today the company is in financial trouble.

Fortune 500 leases are plagued with the same kind of traps that wiped out the advantage of a great location for XCORP.

The lesson here is that a company can incur big, unwanted liabilities if it selects a broker only by its supposed knowledge of the market. Especially since landlords, eager to attract tenants, let everybody know about any available space they have, and all brokers have access to databases which cover the market.

Landlord brokers don’t alert tenants to lease traps because such brokers have fiduciary obligations to increase landlord revenue.

Unless you have retained a Lawyer whose specialty is Commercial Real Estate, the Lawyers tend to overlook lease traps which involve market, operations or accounting issues.

To gain the advantages of a great location, you need a great lease negotiator who combines expertise in real estate markets, expertise in real estate law, expertise in building operations, and expertise in landlord accounting practices, expertise in real estate negotiation itself — and a policy of representing tenants exclusively.

Groundbreaking on new construction dropped 22.5 percent last month to an annual rate of 479,000 units, according to Commerce Department data released on Wednesday. This was just above a record low set in April 2009 and way below the estimates of economists, who had been looking for a smaller drop to 570,000.

January’s figure was revised up to 618,000 units from 596,000. But that did not change the tenor of the report, which confirmed that the sector is failing to recover despite interest rates near record lows.

Building permits, a hint of future construction demand, fell to a record low of 517,000 units from a revised 563,000, and were down by about 20 percent from levels seen in February 2010.

Housing was at the epicenter of the financial crisis of 2007-2009.

One key impediment to the sector’s recovery is a vast backlog of unsold inventory, while a shaky job market has also made consumers reluctant to embark on any major new financial commitments. Making matters worse, a glut of foreclosures, stalled in recent months by revelations of improper loan documentation, is depressing the market.

Lawrence Yun, NAR chief economist, said a pullback in construction is helping stabilize the market. “Very limited construction of new commercial real estate over the past few years has essentially fixed the supply of available space,” he said. “This means vacancy rates could fall quickly from any increase in demand for commercial space.”

From the first quarter of this year to the first quarter of 2012, NAR expects vacancy rates to decline 0.5 percentage point in the office sector, 1.3 points in industrial real estate, 0.1 point in the retail sector and 0.9 percentage point in the multifamily rental market.

“Even with declining vacancy rates, rents are not likely to turn positive in most markets until next year, outside of multifamily rental properties,” Yun said. For example, office rents are forecast to fall 1.8 percent this year before turning higher by 4.0 percent in 2012.

“Apartment rent increases are expected to accelerate from job creation leading to new household formation, particularly among the young adult population who will seek their own housing arrangements – many will be leaving their parents’ homes, or choose to live with fewer roommates,” Yun said.

Average apartment rent is projected to grow 3.4 percent this year and another 4.2 percent in 2012.

“Rising apartment rent in combination with rising oil prices could push the overall inflation rate beyond a comfort level, which could then force the Federal Reserve to raise interest rates later this year or early in 2012,” Yun added.

The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 360 local market experts1, shows a notable improvement in market fundamentals.

The SIOR index, measuring the impact of 10 variables, rose 8.1 percentage points to 50.7 in the fourth quarter, the largest quarterly gain in five years, and is at the highest level since the fall of 2008. However, the index is well below a level of 100 that represents a balanced marketplace. This is the fifth consecutive quarterly improvement following nearly three years of decline, but the last time the index was at the 100 level was in the third quarter of 2007.

Seventy-eight percent of SIOR participants expect improvements in the office and industrial sectors for the first quarter of this year.

There has been an increase of liquidity in Commercial Mortgage Backed Securities, which is helping to open the commercial market to more property transactions; commercial real estate sales had been stalled over the past few years with excessively tight credit conditions. In terms of development acquisitions, it remains a buyer’s market for those with cash or who can obtain credit financing.

Does the drop signal a widespread commercial real estate recovery? Or is it the beginning of a mini bubble? Robert White, CRE, CEO of New York–based Real Capital Analytics, weighs in.

What factors are contributing to the rapid price increase and cap rate declines in core commercial properties?

Capital is looking for yields, and real estate is offering pretty attractive returns compared with money market funds or the stock market. Real estate also has a special attraction as a hard asset, which makes it valuable as a long-term hedge against inflation. So everyone is concluding: “If I can buy a well-located, stabilized office building in a large, high-barrier-to-entry market, my risk is low.” That’s pushing up prices.

So it’s a familiar story of a lot of capital chasing relatively few properties?

There’s definitely a concentration of capital looking for core office. In 2010, about 75 percent of the deals tracked by my company were core property purchases in markets like New York and San Francisco. The competition for product is producing cap rates in the mid-5 range. That’s a big spread when you consider that the average office cap rate nationwide is closer to 8.

Are these lower cap rates justified?

A lot of my clients ask me that. I don’t think most buyers will have to worry about overpaying. Even at a 5 1/2 cap, there’s a 250-basis-point cushion in the risk premium spread over 10-year Treasuries. In 2006, when we last saw cap rates this low, properties were trading at cap rates at or below Treasuries. Add to that the interest rates at near historic lows and an investor can still have positive leverage.

What about fundamentals? Do they justify the price increases?

Fundamentals are going to improve, and since most of today’s institutional and REIT buyers are looking at much longer time horizons than buyers were a few years ago, they have time to wait.

Do you expect current investors to keep bidding up core office prices in 2011?

No, the gap in the market in core pricing between first- and second-tier cities is already beginning to close. Investors—especially nontraded REITs, which have more geographic flexibility than some publicly traded REITs and institutional buyers—have already started to look for alternatives that provide higher yields. At the end of 2010, you were beginning to see more investment in core office properties in smaller cities like Minneapolis, Richmond, and Salt Lake City. The loosening of the credit crunch and the revival of the CMBS market should also support investment in smaller cities. The loosening of the credit crunch and the revival of the CMBS market should also support investment in smaller cities

We’ve focused on the price appreciation in office buildings. Are you seeing similar higher prices and lower cap rates in retail and industrial properties?

To a certain degree, yes, especially in larger retail centers with a grocery or big-box anchor. Over the last nine months, we’re beginning to see trades at cap rates in the mid-6s. Some of the same investors that have been bid out of a trophy office property have started to look at retail. Industrial has been more of a laggard.

Money is available. Life insurance companies believe they will lend $32 billion to commercial real estate—double what they invested in 2009.

Additionally, six new commercial mortgage? backed securities (CMBS) conduit lenders are taking applications and actively making loan quotes.

The market is broken into three tiers. Tier 1 is life insurance companies, which are seeking the highest quality deals with the best borrowers, the best products and the best locations. They will price loans accordingly—as low as 5.75 percent. Tier 2 represents the banks. Bigger and/or healthier banks will “reach up’ to Tier 1 and compete with life insurance companies when they can. Smaller regional banks, on the other hand, will reach down to Tier 3 and, accordingly, they will price higher. Tier 3 is made up of finance companies and conduits who can’t compete with these lenders—or who choose not to compete because of yields. However, capital and capital providers are actively financing again with an interest rate range of 6 to 8 percent.

Loan-to-value is no longer a driving force in underwriting. Lenders are uncomfortable with market fundamentals and therefore the question of the true value of commercial real estate. Lenders are underwriting against debt service coverage ratio and debt yield. Debt yield is the ratio of verifiable net operating income divided by the principal balance. Lenders want a debt yield number between 10 and 12 percent, down from 12 to 17 percent.

Apartments, office, industrial and retail are the primary property types of interest to lenders. There is some appetite for hotels and medical offices. There is light appetite for vacancy—in-place income is key. There is also capital available for the borrower who needs to improve a property but doesn’t have the necessary Funds– but it will be expensive.

Interest rates will be flat to lower in 2010, and, as the year progresses. Over the next three years, interest rates will rise.

Proceeds seem to be in the 60 to 65 percent range but competitive pressure throughout the year should move life insurance companies to 70 percent and CMBS conduits to 75 percent. There is an outside chance that by year-end, a momentum play will create venues in the 80 percent range.

Lenders are motivated to make new loans because doing so helps to mitigate the risks in their existing portfolios.

There seems to be no way to differentiate one capital provider from another. They think alike and seek alike. Working with an experienced financial intermediary can help ensure that lenders select the right deals with the right structures for the right reasons. Relationships will be important.

When considering your new office premises, it is critical to address the following questions:

What are my options?

Stay put: If your current space satisfies your business needs, but you are approaching the end of your lease, you may wish to consider renewing your lease. You will need to ensure the space is available, and then negotiate a new lease with the building owner through your tenant representative. However, no decision to renew your lease should be made without a thorough market evaluation and the introduction of competition for your tenancy into the dynamic of the renewal negotiation.

Relocate: The expiration of your lease could offer you an opportunity to transform your business and create new efficiencies by relocating.

Why should I relocate?

Business needs and Economic Benefit: If your current space is too small, too large, or inflexible relative to the way your organization works, a new office can energize your organization and act as a springboard for improved productivity and operational cost savings. Additionally, market conditions may create cost benefits supporting the business case for relocation.

Brand value enhancement: The quality of your building and the tenant improvements in your office space speak volumes about your organization. A renovated office space or new building can strengthen your employees’ perception of your core values and elevate your brand in the minds of customers and other stakeholders.

Employee satisfaction and retention: By repositioning your business and employees in an improved work space, you will realize increased staff morale and productivity. Our market research showed that even subtle changes in the work environment have created substantial gains in productivity, resulting in improved bottom-line financial performance.

How much will it cost?

Operational costs: The negotiation of rent and tenant incentives is dependent on the dynamics of the market. In certain areas, the development cycle has created higher vacancy, which favors tenants. In other markets, low vacancy gives landlords the upper hand in negotiations.

Tenant improvement costs: Your entry and exit strategy to a lease can greatly affect the real cost of your commitment. Workplace design and tenant improvement costs should be viewed as an organizational opportunity—a well-planned and executed tenant improvement will adapt to your organization’s growth and changing needs and minimize disruption costs. Balancing your tenant improvement costs and the benefit it yields to your organization is critical. In addition, “make good” commitments will affect your cash flow when exiting a lease.

When should I start?

Plan, plan, and plan: Whether you decide to stay or go, knowledge is key. Allow sufficient time to ascertain your current situation, review other options, assess the marketplace context and negotiate with your current landlord to ensure you optimize the end result.

Timing: The period required once decision is made just to conduct the lease negotiation and relocation process ranges from three to six months at a minimum. Depending on the size of your organization and the current market conditions, you should prepare to begin this process 12 to 18 months prior to your lease expiration. For larger companies it may take two years or more to complete the lease and relocation process.

Whom should I involve?

Your internal steering committee should be led by a senior employee, and supported by decision-makers and influencers including human resources, IT, divisional heads and staff. A single point of contact from your organization, matched with a single point of contact from your real estate advisor is an ideal match to make the process run smoothly.

You may wish to conduct a survey of your staff to determine their needs, preferred work style and location. Your tenant representative can conduct a needs analysis survey of your staff to determine the impact of relocation on commute times and employee retention.

Professional real estate advice is a critical part of the project team. This will arm you with insight into the marketplace, your alternative options and the financial implications of the stay or go scenarios. A skilled design professional and construction manager will complete the team by providing knowledge of productivity-enhancing tenant improvements.