Red flags.  They are everywhere in life.  An email shows up with a suspicious link.  A call comes in trying to sell you a car warranty (do they know I drive a 10-year old car with 110,000 miles on it?).  On today's episode Bob and Jan discuss red flags when it comes to your commercial real estate lease and what to do about them.

Today's topic aligns closely with a podcast we had two weeks ago regarding operating expenses - the bane of a tenant's life!  Most of these red flags tie directly back to operating expenses in one way or the other.  

Is the return to the office happening faster than expected?  If so, what's the impact on landlords, tenants and investors?  On today's podcast Bob and Jan peer into the crystal ball one more time!

It seems that most return to the office announcements were expected to take place either July 1 or after Labor Day.  But some people say it's happening faster than expected with many companies, including large institutional lenders, having their employees roll back in this summer.  I'm not actually seeing it widespread but I do agree that there is a lot of talk about having employees return to the office sooner.  We certainly have clients doing so and we've seen announcements from large companies like JP Morgan and Google which have moved up their return to work dates to mid summer.

This is likely due to a faster than expected vaccine roll out and removal of city and state restrictions....at least that's the analysis in a WealthManagement.com article.  It's definitely been a bumpy ride, but they quoted a CBRE survey that shows companies returning to a more normal occupancy throughout 2021.

I just don't think anyone knows what "normal" will look like in the future.  I saw a headline a few weeks ago saying that there's a study to support whatever opinion you have about the future.  A JLL broker was quoted in the WealthManagement.com article saying that the talk "of dramatically reducing office space has softened in recent months".  That's anecdotal.  I'm not sure the market data would support that position.

Texas cities have had a higher percentage of employees back to the office throughout the pandemic.  The Kastle Systems Back-to-Work Barometer has Dallas still at the top with Houston and Austin close behind.  It's been that way the whole time and remains so.  But the increase in the last 3-4 months hasn't been that much - maybe only a 3-5% increase.  The top 10 markets in the country for Kastle averages only around 29% at the end of May which is up only a couple of percentage points.

When you sign a lease you focus on what the condition of the space will be when you move in because you want it to reflect the image of the company and be a great place for employees and customers.  But few people consider what the space will look like at the end of the lease after they move out.  Failure to address that may create major headaches in the future.  What do most leases say the condition of the space must be after the tenant moves out?  First, it depends on the type of building as to what language is normal.  Industrial and office won't be the same.  You would expect offices to be more strict, but it's actually the opposite.  Office leases often use the broom swept or broom clean term, but industrial leases often have a whole separate exhibit that's a full page or two of all the things the tenant must do to the space when they move out.

OK, define broom clean - broom clean just means that everything has been moved out of the space and it has been swept or vacuumed.  The condition is subject to normal wear and tear, of course.  But that may just be the beginning.  Who defines "broom clean" and "normal wear and tear"?

Again, protect yourself by negotiating the original lease correctly.  Review all clauses pertaining to move out condition carefully.  

Avogroup had a good article the other day regarding two ways to protect yourself on operating expense pass throughs from your landlord.  On today's podcast, we dive deep!

Let's start with a definition:  what are operating expenses?  They are the monies required to run a commercial building.  They can include, common area maintenance, security, electricity, taxes, insurance, etc.  The landlord pays those fees and then turns around, divies them up among the tenants and bills each one their prorata share.  The two avenues of protection are:

We get the privilege of introducing our dear friend, Nick McCalmont-Woods, with McCalmont-Woods Real Estate in London, to the podcast today.  Nick describes how CRE is conducted 'across the pond' and has great stories to tell.  Like how he met us for the first time!  And our all-time favorite story of how MAGA is missing one letter....

Lease structure in the UK is totally different then in the US and Nick walks us through their process.  Length of leases, breaks versus renewals, rent structures, how tenant reps are compensated, who pays the broker, etc.  Also discussed are market conditions and Nick's latest venture  called FIDES Network - how it works - and how it's all so important with the advent of Covid.

Just how do Landlords and Tenants ever agree on tenant finish out?  Who pays for what?  Can the tenant do anything they want in the space?  What happens if the project doesn't finish on time?

First, TIs stand for Tenant Improvements - it just means the improvements needed in a space to make it suitable for a tenant to conduct its business.  Occasionally, small tenant or those in a rush will lease space that's already finished out and ready to occupy.  These suites are called spec suites and landlords have been building these in office buildings for years.  In fact, a few landlords have built new buildings and finished out the entire building with spec suites from the beginning.  This type product is probably less than 4% of the total office market, however.

What are the steps needed in determining how to finish out the tenants' space?

It is published that 80% of companies stay in the same place and extend their lease when their lease expires.  Why is that?  The main reason is that it's the path of least resistance-it's easier and causes virtually no disruption to the business.  Today we have 8 tips for helping people decide whether to stay and extend their lease or move:

How much of your office do you actually use?  And I don't mean now but before Covid.  A recent study suggests that office occupancy may not have been used to the extent previously thought.  This study, by VergeSense, found that office spaces were greatly underutilized before Covid.  And not just a little bit.  We're talking only 30% utilized.  As a caveat, VergeSense's business is office utilization and transformation consulting.  So, they may have a dog in this race.  They tracked this info using deep-learning sensors which count people as they move throughout the office.  The study also states that the average utilization of offices in January of 2021 was only 7.9%.  The study claims that office space is now being used more collaboratively since the pandemic with a 15% increase in the amount of overall utilization dedicated to collaborative work.  So, we still need office space just build it out differently?  Utilization and allocation are two different things.  The study points out there is a mismatch between how much space is allocated for different uses and the utilization of those spaces.  The 83% of office space allocated for individual work was only utilized 28% while the 17% allocated for collaborative work was used 35%.  Going forward what is one's advice?  Be careful how you finish out your office space and ask yourself and your team some hard questions-do we want to pay for individual offices and cubes so employees come to work and sit alone sending email to other employees and clients?  What activities can only be done in the office?  Who needs to come to the office to do their job and how many days a week?  Who wants to come to the office versus stay at home, and much more.

A few weeks ago, we discussed 7 questions you should ask before hiring a broker.  That was episode 45.  Today on episode 49 we'll discuss 8 more questions that you should ask before hiring a tenant rep broker.

Covid kicking it down the road is a weird title, but, it's a great concept.  On today's podcast we'll discuss what it is and just how that panned out for one specific REATA client now that the year is expiring.  

Last year we recommended to several REATA clients that they extend their leases for only 12 months.  We did this because demand for office space had not only evaporated, but had gone negative meaning companies were giving back space faster than they were leasing it.  At the same time, there was about 8 million square feet of office space still under construction.  So it's the classic supply and demand discussion.  Supply is increasing while demand is not only down, but non-existent.  Therefore, rents must fall.

As you might expect landlords hated this.  Short-term leases don't really add value to the building and it gives tenants greater flexibility to find other options whether that's other buildings or going to work from home.  But several landlords agreed to 1-year extensions.  Some said they wouldn't do anything less than 3 years, but ended up agreeing to 18-24 month extensions.

In one specific case last year, we were working with a client to expand and extend their lease either in their current building or one down the street.  It was going to be either a 5 or 7 year lease.  When Covid hit we immediately called the client to discuss the situation and we recommended that we halt all negotiations and reconsider everything.  The client had lost a couple of employees just before Covid and they are in the financial services industry.  As you may remember, the stock market fell precipitously in the early days of Covid.  So we made the recommendation to just extend their lease, where they were, for 12 months.  They didn't need to expand right away and needed time to stabilize their employee base as well as their client base.

The client was all for this idea - they didn't know that extending for only a year was even a possibility.  So the idea of signing a long-term lease commitment for MORE space right at the time when the future was so uncertain scared them to death - understandably.

Listen to the podcast to hear what ended up happening for this client!