Copypasta from the Daily Journal of Commerce.
www.djc.comWorking in commercial realestate, I find it interesting how everyone is seemingly distrustful of the .gov's ability to spend their way out of this. Large inflation numbers seem to be assumed. :( I also think it's interesting they are opening a hostel, but targeted at local workers etc.
April 16, 2009
Real estate strategies for troubled times
By LYNN PORTER
Journal Real Estate Editor
In the past 30 or so years, Grubb & Ellis Managing Director Craig Hill has made much of his
income from brokering the sale of office buildings in the Puget Sound region, in recent years
riding a wave of progressively higher prices.
But now “investment sales don't exist,” said Hill, only slightly exaggerating conditions in the
local market.
Today his work is in representing tenants in lease renewal negotiations for office space. These
are firms that no longer need all the space they rented in better times and are looking for the new
terms in a market where vacancies are up and rents are down, said Hill. They include one tenant
who asked for a year's free rent on a five-year lease, he said.
“The majority of transactions that I've been involved in have been downsizes,” he said.
The companies who bought Seattle office buildings spun off from the massive Equity Office
Properties sale in early 2007 are “struggling to maintain rents” in a market where vacancy is 14
percent and expected to rise, he said.
“We still don't know where the floor is,” he said. “That's what we're faced with right now.”
Hill spoke Wednesday at a NAIOP spring seminar on Development Strategies in Troubled Times
at the Sheraton Seattle.
Other panelists also offered their perspectives on the market:
—Seattle developer John Teutsch, said tenants of commercial properties are more cautious than
they've been in previous recessions. In prior down cycles, they typically would take free rent and
greater tenant improvement packages in exchange for higher rents later in their tenancy, he said.
Now, they want a clearer picture of the future, so they are declining those packages in favor of
no dramatic rent upticks, he said.
“Folks just really want to keep their rent as flat as they can,” Teutsch said.
This tenant mentality puts at a disadvantage owners of new buildings hoping to trade up front
concessions for rent spikes later — rents they need to make the projects work, he said.
Calling this “the mother of all recessions,” Teutsch said it should eventually offer some good
bargains for investors, just not yet. “It's just that you have to have cash to take advantage of it,”
he added.
—Jim Potter, chairman of Kauri Investments, which develops mixed-use and multifamily, said
his Seattle-based firm is involved in a number of projects that aren't upscale.
“It's a dogfight at the high end, so we like to be at the middle or low end,” he said.
Independent of Kauri, Potter also invests and develops in that arena. As an example, Potter and
Scott Shapiro of Eagle Rock Ventures in late 2008 purchased a former single-room-occupancy
hotel in the International District. They intend to bring back the building's old name, the
American Hotel, and make it into a hostel with about 300 beds in shared rooms. Nightly rates
would be about $35 a bed.
Potter sees international travelers, downtown Seattle workers, and people who work downtown
but live elsewhere as potential customers.
“We have this romantic idea that everybody needs a lot of volume in their housing, and I think
you're going to see a change in the other direction,” he said.
—Rob Aigner, senior vice president, regional manager with Harsch Investment Properties, said
his firm believes that “the number one asset we own in any market is our existing tenant base.”
Harsh works to keep tenants in a number of ways, he said, including by giving them a
welcoming basket, by having property managers walk its business parks daily so they are visible
to renters, and by offering free stuff.
“People love free stuff,'' he said. ‘‘They'll stand in line for ice cream cones, a pretzel, a free cup
of coffee.”
Harsh owns primarily small, multi-tenant industrial buildings. It has 475 tenants in its Northwest
portfolio. Aigner said that in the last quarter 20 didn't renew because their businesses failed.
“To have half of your non-renewals be because of default or bankruptcies is concerning from my
perspective,” he said.
—David Gartland, an owner of Underwood Gartland Development, said commercial property
owners need to be cognizant of the effects inflation could have on values in the coming years.
“As we've all heard, the government is going to spend our way out of this recession,” said
Gartland, who has a master's degree in taxation.
Rents should rise with inflation, bringing up building values, he said. However inflation should
cause upticks in lending rates, possibly in the double-digits. That would mean a smaller pool of
potential buyers, and could lead to price drops. With that in mind, owners need to decide whether
to sell in the near term or wait out the inflationary period, he said.
—Gary Bullington, a director with Cushman & Wakefield, said office building owners “must be
frozen, just trying to come up with a strategy” to fill vacancies, keep tenants, and, if need be, to
refinance.
His firm's appraisal group “couldn't be busier” trying to help many office building owners get a
read on the value of their properties, he said, but that's difficult because there have been so few
sales.
Lynn Porter can be reached by email or by phone at (206) 622-8272.
© Seattle Daily Journal and djc.com.
