East Side Bang for the Buck - Class A Arbitrage!

A few months ago I prepared a report on the Manhattan East Side Submarket. Before the information gets outdated, I thought I would share it. So, without further ado . . .

The East Side Submarket is defined as:

- 37th St. – 60th St.
- East River – Lexington Ave.

- excludes Lexington Ave. and west side of Third Ave. from 39th to 46th St.

As you can see in the chart below, historically East Side rents and vacancy rates track Midtown Manhattan rents in general.

What's interesting, however, is the gap between Midtown rents on the whole and East Side rents that has been growing since the year 2000. There is now a $10 difference! What is really telling, however, is this next chart, which tracks Midtown Class A & B rents and East Side Class A & B rents.

As you can see above, there is basically no gap between Class B rents on the whole in Midtown and East Side Class B rents. However, the gap between Class A rents in Midtown and Class A rents on the East side is huge - $25!

I have some theories for which can account for some of the discrepancy (new class A inventory on the West Side, impact of the Plaza district, etc.). However, I do not believe that there is a good justification for this incredibly large discrepancy. Sure, the East Side does not have the best transportation in the world, but virtually all of the East Side's Class A buildings are on the West border. The point is, that if you are looking for Class A space in Midtown, there is rent arbitrage opportunity between the East Side and the rest of Midtown, and you should take advantage of it!

Grubb & Ellis Weekly Market Insight Update

Available Office Sublease Space

Here is Grubb & Ellis' weekly market update courtesy of Bob Bach, Grubb & Ellis' Chief Economist.

Commercial real estate fundamentals lag the economy, but one market indicator in particular provides an early warning sign of impending changes. Office sublease space has increased by 12% from its recent low in the second quarter of 2007, ending the first quarter of 2008 at 81.9 million square feet. During the last downturn in 2001, sublease space more than doubled after three quarters of softening. Thus, the office market is feeling the effects of the weaker economy, but the pace of softening so far has been gradual.

"Buy into Fear and Sell into Greed"

This scruffy guy with the pony tail is the former Chairman of Grubb & Ellis and NNN Realty Advisors - Tony Thompson. He's pretty eccentric, but very successful. Thursday he was interviewed by GlobeSt.com regarding the founding of his latest company - Thompson National Properties.

One of Tony Thompson's favorite quotes is "Buy into fear and sell into greed." While everyone is nervous about the economy, property values are coming down and financing is tough, these are valuable words to remeber. This is particularly true for those of you with CASH! Cash is king right? The truth is, the people in trouble right now are those who were to highly levered (read: Harry Macklowe). Those with the cash to buy the troubled buildings and development sites are in a position to capitalize on the market.

If you're looking for a deal - I know a building expected to sell for $700 million less than it would have a 9 months ago (read: GM Building). There are other opportunities out there as well - keep your eyes open.

Why TICs are good! - Part 2 - Why a 1031 TIC?

In my last post I explained what a 1031 is, and showed you the advantages. Now, let's go back to Isabella Investment. Isabella has decided that she'd like to save the 27% in taxes and go with a 1031 exchange. However, the idea of owning another commercial or investment property is really not all that appealing to her. She's selling her office building, because she's sick of the headaches that go with being a landlord. Furthermore, she's nervous about having all of her money tied up in one small building in New York City. She wants to diversify, and she would love to invest in a big office building, one she simply couldn't afford to own by herself. To make things even more complicated for Isabella, according to the 1031 statute, she must identify buildings in which she would like to invest within 45 days in order to defer taxes!

Well, incredibly enough, Isabella is the ideal 1031 TIC investor. But what's a TIC? TIC stands for Tenant in Common, and it is simply a situation where multiple people own one building. It could be you and your uncle George, or in the case of the TICs Grubb & Ellis offers, they are securitized investments regulated by the SEC.

So, how does it work? OK . . . here it goes. Before Isabella sells her office building, she identifies a "qualified intermediary" (basically an escrow agent). When she sells her building, the qualified intermediary holds the money temporarily. Once she sells the building, the clock starts ticking, Isabella has 45 days to identify up to 3 buildings for potential investment, and up to 6 months to close on one or more of these properties. She calls up Grubb & Ellis (or another TIC provider), and is presented with several opportunities. The buildings are located throughout the country, and in different industry sectors. After careful deliberation, Isabella decides she is interested in a golf course in Florida, a medical office building in South Carolina, and a retail shopping center in New Jersey (yes, these are all considered to be "like kind" for tax purposes). It has now been a month since Isabella sold her office building, so she has 5 months to go to close on properties.

Isabella decides she would like to invest in the medical office building, and the retail shopping center. There is $30 million in total equity invested in the medical office building, and Isabella invests $1 million. She receives a deed for 1/30 of the property. There is $15 million in total equity invested in the retail shopping center, and Isabella invests $1 million. She receives a deed for 1/15 of the property.

For the next 3-8 years Grubb & Ellis (or a similar company) manages, leases and handles all maintenance on Isabella's investment properties. Meanwhile, Isabella receives checks for her share on the profit from leasing the buildings. In 3-8 years, the properties are sold and Isabella receives her share of the profit on the sale. She then must decide again, to defer or not to defer.

Why TICs are good! - Part 1 - What is a 1031 Exchange?

As you may know, Grubb & Ellis recently merged with NNN Realty Advisers. As a result of the merger, Grubb & Ellis is now, not only a corporate real estate services firm, but also a leading sponsor of real estate investment programs. Most notably, Grubb is now the number one sponsor in the country of tax-deferred 1031 exchanges via tenant-in-common in partnerships.

What does that mean? Glad you asked!

Let's start off with a primer on 1031 exchanges. 1031 refers to a section of the Internal Revenue code - here's what it says:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."

Quite simply, the government will let you defer taxation on the gains from a sale of commercial or investment property if one invests in similar property. Here's an example:

Isabella Investment owns an office building in New York City. She purchased the building in 1990 for $300,000. It's now 2008, and she decides to sell the building. In this market, she can get $2 million for the building. That's a capital gain of $1.7 million. This gain is taxable in the following ways:

1. Federal capital gains tax of 15%


2. State and (in the case of New York City), city capital gains taxes. These income taxes depend on your tax bracket, but the rule of thumb, is that these add up to an additional 12%.


3. Depreciation Recapture tax - a tax on whatever amount of money you depreciated (on a straight line basis) for tax purposes. Recapture tax is 25%.
   
4. Excess Depreciation Recapture tax - a tax on certain structures and improvements that you've depreciated on an accelerated basis. This is taxed as normal income, and is up to 35%.


5. Real property transfer taxes. In NY state, this tax is .4% of the full purchase price. Additionally, New York City applies a 2.625% transfer tax.

In all cases, the first 4 taxes on this list may be deferred. Only in special cases may the transfer tax be deferred as well. Let's see how this plays out for Isabella - we will assume that Isabella fully depreciated her office building:

Scenario 1 - Isabella does not do a 1031:

Sales Price: $2 million
Capital Gains: $1.7 million
Federal Capital Gains Tax: $210,000 ($255,000 - $45,000 covered by recapture tax)
State & City Capital Gains Taxes: $204,000
Depreciation Recapture Tax: $75,000
Excess Depreciation Recapture Tax: For the purpose of this example, we'll assume this doesn't apply although it would likely only make her taxes higher!
Transfer Taxes: $60,500
Total Taxes: $549,500
Total Tax %: 27.5%
Equity to Reinvest: $1,450,500

Scenario 2 - Isabella does a 1031 exchange:

Sales Price: $2 million
Capital Gains: $1.7 million
Transfer Taxes: $60,500
Total Taxes: $60,500
Total Tax %: 3%
Equity to Reinvest: $1,939,500

Additional Rent!? Post #3 - Operating Expenses

The third major component of "Additional Rent" is "operating expense escalations." This is a charge assesed by the landlord on a yearly basis to account for increases in the cost of operating the building. There are several ways that landlords bill for operating expenses. Without further ado, here it goes:

1) Direct Pass through - Generally considered the most favorable option. With a direct pass through, the landlord bills the tenant for it's proportionate share of the increase in operating expenses. Often the landlord will estimate what what this increase will be and later will adjust the charges accordingly.

2) Fixed Escalation - Often, in lieu of determining a tenant's proportionate share of operatin expense increases, a landlord will simply increase the tenant's rent a certain percentage per year. Currently, the going rate for this set increase is about 3% of the gross rent. While this option offers peace of mind to tenants, it often results in higher payments than a direct pass through. It is important to note, that these increases compound year over year and it is imperative that your real estate advisor performs a comprehensive financial analysis so that you may know exactly what you will be paying in the future. As a quick example, a $65 per sf rent escalataed 3% annually for 5 years will cost you over $73 per sf in year 5! Fixed escalations are most common for small tenants.

3) CPI Escalation - CPI stands for Consumer Price Index. The CPI is a measure of the change in prices of a representative basket of goods and services over time. Baseically, CPI is a measure of inflation. In the case of a lease tied to CPI increases, however much the cost of the basket of goods goes up per year is the percentage that the lease goes up. CPI esclations are still used in NYC, but are relatively uncommon.

4) Porter's Wage Escalation - Unique to NY, the Porter's Wage escalation increases a tenant's yearly rent per sf based on the hourly average increase for Porters in the Local 32BJ union. For instance, if the porters negotiate an increase of $1 per hour a tenants rent will go up $1 per sf. This is called a "penny for penny" increase. There are many variations on this formula, however, including, "3/4 of a penny for penny," "1.5 pennies per penny," and with or without "fringe benefits." Like CPI, this kind of escalation is still used, albeit rarely. Typically, this type escalation is not favorable to tenants.

Additional Rent!? Post #2 - Taxes

In a modified gross lease, the tenant is responsible for paying for their proportionate share of the increases in real estate taxes.

Here's how it works; initially any real estate taxes on the space are included in the gross rent, this first year is generally used as the "base year" (although sometimes another year is used). The base year is the year from which all calculations are started and it is specified in the lease.

Now, this is where it gets tricky . . . New York's fiscal year begins on July 1, and this is when tax assessments for buildings take place. It is critical, that you know whether the base year in your lease is based on the Fiscal Year, or the Calendar Year. If it's the calender year, then the taxes are based on half of the fiscal year preceding that calendar year, and half of the fiscal year subsequent to that calendar year.

Anyway, you generally have one year before you have to start paying rent based on real estate tax increases. Once there is an increase in real estate taxes, that increase is divided among the tenants based on their "proportionate share" of the building. This is where things get tricky yet again. It is critical, that the proportionate share you're paying for, really is your proportionate share of the building. As I mentioned in "Loss Factor Demystified," landlords often "grow" the size of the building to compete with prevailing market loss factors or to push the limits on loss factor to increase profits. However, proportionate share of the building should never change - unless the building really does grow. Your remeasured space must be divided by the remeasured total for the building to find out your actual proportionate share. If your remeasured space is divided by the old square footage of the building, you will end up paying for a larger percent of the building than you actually occupy.

One final note on real estate tax escalations. It is generally assumed that real estate taxes will go up. However, landlords often fight tax assessments, and sometimes real estate taxes go down. Make sure that the same way you pay for your proportionate share of tax increases, the landlord pays you for your proportionate share of tax rebates.

Stay tuned for my next post, Additional Rent!? Post #3 - Operating Expenses

Additional Rent!? Post #1 - Electricity

The picture to the left is the cover of a real estate brochure from the former NY firm, Cross & Brown. Rosanne DeBernardo in my office used to work for Cross & Brown (before they were acquired and amalgamated into what is now CBRE) and she was kind enough to share some momentos of her past. I think this picture is pretty funny, and it really shows us how far we've come.

And now, without further ado . . . by request of John Lench - Grubb & Ellis broker extraordinaire in Tyson's Corner, VA and former NYC real estate broker, today I am touching on "Additional Rent." I imagine that this topic will take multiple posts, because it certainly is not simple, particularly in NYC.

To get started, it's important that one understands the basic principles of an office lease. There are two basic types of office lease, the triple net lease, and the gross lease.

In a triple net lease, the tenant pays for all of the expenses of the building, including maintenance, taxes, operating expenses, etc.

In a gross lease, the tenant pays only for the rent of their space, and the landlord is responsible for everything else.

Now, I have grossly oversimplified this, so if you want more information on the variations of these leases, do a Google search.

In Manhattan, we generally use what is called a "modified gross lease." In actuality, it more closely resembles a net lease, but that's besides the point.

In a "Modified Gross Lease" the tenant is responsible for paying base rent, electricity, and the tenant's proportionate share of any increases in operating expenses and taxes. What's important to note about this type of lease, is that landlords love to use these increases as a way to make more money, so it's critical that you understand how the increases work in order to protect yourself from overpaying. These increases are generally labeled in the lease as "Additional Rent."

Let's start with electricity - There are three ways that electricity is billed.

1) Direct Meter - In this case, you have a meter straight from the local utility, and you pay the utility directly for amount of electricity you use. This is generally the most favorable way to be billed for electricity, but it is becoming less and less common. Direct meters are often found on full floors of small office buildings.

2) Sub-meter - In this case, the landlord buys the electricity in bulk (at a discount) from the local utility. He/she then installs individual electric meters on the circuits going to each tenant. Tenants are billed for their actual use, and the rate at which they are charged is based on a markup of what the landlord pays. The landlord tacks on this markup to account for the cost of the administration of the sub meter and to make an extra buck. The typical markup is somewhere between 10-17%.

3) Rent Inclusion* - This is the third, final and least desirable way to pay for electricity. The landlord charges you a set amount of money per sf per year. This charge has absolutely nothing to do with how much electricity you actually use. Rent inclusion is most commonly applied to small tenants in large buildings. There is an expense for landlords to install a sub-meter for a tenant and in the case of small tenants they generally are not inclined to do so. Also, small tenants have much less leverage in negotiating with a landlord, and this is a great way for them to make additional money. The standard charge per sf for electric is generally between $2.75 and $3.50.

* A note on Rent Inclusion - Many leases make the rent inclusion "subject to survey." Most unrepresented, or poorly represented tenants simply overlook this clause. This means, that at any time, the landlord can send a company into your space to survey the amount of electricity you are actually using. If you are using more electricity per sf than you are paying for, the landlord may increase your electric charge accordingly. This may not sound so bad if you are a standard tenant, but what if the Landlord surveys your electricity use on the hottest day of the year, when your a/c is at full blast, or during tax week if you're an accountant? Contesting this increase is tough and expensive.

So, now you know what to look out for when it comes to electricity. In my next post - tax increases!

How to Get the Dirt on a Building

I was recently asked by a blog reader to shed some insight on a particular building in Manhattan. While I'm happy to do that (and I may include my findings in a future post), it got me thinking that now would be a good time to tell all of you about some of my favorite sites for researching properties. I've limited the list to sites you can access without a paying a usage fee. So, without further ado, here it goes:

The Oasis Map - http://oasisnyc.com/oasismap.htm - This site provides a wealth of information for free to the public. Just type in an address and you'll get info. on zoning, subway stops, block, lot, parks and other great stuff.

PropertyShark - http://www.propertyshark.com/ - Some of the same info. of Oasis, but also includes recent sales price, an approximation of its value, title history, code violations, permits, photographs, maps, etc. Basic use of PropertyShark is free, but to dig a little deeper you'll need a paid membership.

ACRIS - http://www.nyc.gov/html/dof/html/jump/acris.shtml - Standing for Automated City Register Information System, this is the official NYC online building register. Using this system you can lookup any legal document on record with the city for a given building dating back to 1966. Not only can you get the details for the document, but you can even print out a scanned original.

New York City Map Portal - http://gis.nyc.gov/doitt/mp/address.htm - This site is a good supplement to Oasis and PropertyShark for property mapping.

New York: A City of Neighborhoods - http://www.nyc.gov/html/dcp/html/neighbor/neigh.shtml - A complete electronic neighborhood map with boundaries for all NYC neighborhoods as defined by the city.

NYCProperty - http://nycserv.nyc.gov/nycproperty/nynav/jsp/selectbbl.jsp - Find out the tax assesment for any NYC property.

PlanNYC - http://www.plannyc.com/ - This site is a fantastic one stop shop for everything you want to know about NYC major urban planning projects.

Here are a few more that I use infrequently:

NYC Department of Buildings: Building Information System - http://a810-bisweb.nyc.gov/bisweb/bsqpm01.jsp

NYC Buildings Research Guide - http://www.columbia.edu/cu/lweb/indiv/avery/nycbuild.html

Streat Easy - http://www.streeteasy.com/

NYC Architecture - http://www.nyc-architecture.com/

Forgotten NY - http://www.forgotten-ny.com/ - If you're into NYC history, this site is incredible.

Happy clicking!

Manhattan Commercial Rents Continue to Increase Despite Increase in Available Space

Last week Grubb & Ellis Research released Manhattan market trends for the month of April. I encourage you to read the full report, but here are the highlights:

• 1 million SF of sublease space was added to the market
  - Total available sublease space surpassed 7 million SF
  - Addition of sublease space lead by financial services industry
  - Goldman Sachs-600K SF at 77 Water Street
  - RBS-140K SF at 7 WTC
  - Nomura Holdings-110K SF at 2 WFC
  - iStar Financial-107K SF at 1095 AofA
  


• Vacancy went up 40 basis points to 4.9 percent
  


• Leasing velocity down 15% compared to 1Q 07
  - Total leasing activity was 7.6 million SF
  - 48% of transactions were renewals in 1Q 08
  


• Blocks of available space 100,000 SF & greater
  - 14 were added to the market during 1Q08; 26 in last six months
  - 53 total blocks currently available
  - At a minimum, another 20 blocks of space could be made available between now and 2010
  


• Class A asking rents edged up $1.14 to 90.20 per sf

So, what does this mean to you? Well, these stats certainly indicate a real change in the market. Lots of sublease space is becoming available, which increases supply and as such, will lower prices.

So, now you're thinking, if increase in supply results in lower prices, why have prices gone up?

As I mentioned in a previous post, there are many factors that come into play here:

1. The big increase in sublet availability is entirely from large blocks of space which have impacted market availability and vacancy rates as a whole.


2. Virtually no deals are being made on these big blocks yet, and since most of them are new to the market, asking prices are still high.


3. 80% of deals made are 10,000 sf or less. Demand is still very high for these small spaces, and supply is very low.


4. Leasing activity is way down because tenants (with good reason) are waiting until they get better deals.


5. Sublessors are slow to respond to a changing economy, Landlords are even slower.


6. Landlords have begun offering larger concession packages (free rent, work letters, tenant installation $, etc.) in place of discounting the rent.

I expect that we will see rents stabilize very soon and then ultimately come down. Stay tuned for Grubb's 1Q 2008 research report and the May report for more info.

Loss Factor Demystified - Part 2 OR Usable Area - Why it's not really Usable

Yesterday we learned about the "basic equation" for loss factor - (Rentable Area minus Usable Area) divided by Rentable Area. Now, to understand this equation, we have to understand what rentable area and usable area are. As we learned yesterday, rentable area is a made up number, which can be anything the landlord wants it to be.

Today, we're going to talk about Usable Area. In NYC the generally accepted definition of Usable Area was defined by the Real Estate Board of New York (REBNY) in it's paper "Recommended Method of Floor Measurement for Office Buildings" - January 1, 1987.

To sum it up, REBNY defines Usable Area as the full size of the floor measured to the OUTSIDE SURFACE OF THE BUILDING minus common corridor areas, elevator shafts, stairwells, and mechanical space that serves the building. What does this mean to you? It means that whatever "loss factor" your space has, your actual loss factor is larger. After all, you can't actually use the space that the brick on the outside of the building takes up or the space that is occupied by a building column.

By now you're probably thinking, if I can't go by rentable square feet, and I can't go by "usable square feet," how can I tell how much space I can actually use. This is where we come to "carpetable" or "assignable"square feet. Carpetable or assignable square feet is very straightforward. It is simply the portion of the space that can actually be carpeted - the space you really can occupy.

When it comes down to it, the only thing that is important, is that you are comparing apples to apples. To really be able to compare two deals to each other, you should compare them using usable square feet, or carpetable/assignable square feet. (And now a break for self-promotion) You should be sure that you are working with a professional (or group of professionals), that has the capability to effectively perform the complex financial analysis needed to make an informed and confident real estate decision - otherwise, you will do a disservice to yourself and your company.

One last thing . . . when you're looking at space, try not to get too hung up on the the loss factor. When it comes down to it, what is most important is that the space works for you, you can fit your employees in the space, and the pricing makes sense. Of course, you should do the analysis, and make an informed decision, just don't make the loss factor the "be-all and end-all."

Loss Factor Demystified OR The Truth About Loss Factor OR What is a Loss Factor?

If you're looking for office space in NYC, you may have heard about "Loss Factor." You may even think you know what it is - but do you?

Well, to put it simply Loss Factor = (Rentable Area minus Usable Area) divided by Rentable Area. At least this seems like relatively simple math, but what if different buildings use different metrics for determining rentable area and usable area? Besides, why should I even have to pay for space I can't use?

I'll start off, by answering the second question. You have to pay for space you can't use, because Landlords find it more convenient to charge you for space you can't use than to charge you higher rent for the space you can use (like they do in Europe). They figure, that they have to build and maintain these spaces (lobbies, stairwells, corridors, etc.), so why not pass on the cost.

Now, the answer to the first question is a bit more complicated - what does happen if different buildings use different metrics? . . . and they do! I'll explain how it works through the story of Joe Landlord and Steve Landlord.

Joe Landlord has a "1 million square foot" office building. Of that space, 750,000 sf is usable. That means that Joe Landlord's building has a 25% loss factor. Steve Landlord owns the building next door. His building is just like Joe Landlord's and his space rents for about the same number as Joe Landlord's. There's one key difference, and that's that Steve Landlord only has a loss factor of 20% in his building vs. Joe's 25%. What does that mean? It means that Joe Landlord brings in more money than Steve Landlord!

One day, Steve Landlord finds out that Joe Landlord has found this clever way to make more money. Not to be shown up by Joe, Steve decides he's going to "grow" the size of his building. He'll still rent the same floors, but instead of calling those floors 15,000 sf, he's now going to call them 17,500 sf. Voila! Steve now has a 27% loss factor.

For those of you who haven't heard about this practice, you're probably shocked and appalled. You think, this must be illegal, you can't just say that a floor is larger than it is! Well, actually, in NYC you can. If it makes you feel any better - everybody does it (no, that doesn't make it right), but if you are a landlord, and you don't do it, you'll either sacrifice a lot of money, or have to charge exorbitant rents to compensate.

Now, I know I haven't told the full story, so stay tuned for tomorrow's installment, where I'll tell you about the other half of the equation above . . . usable area! (and why it's not really usable)

Take the Cash Allowance or Move On?

In this market, most existing tenants are looking for any angle possible to save a few bucks on a new lease. For many, this means moving to a different part of town, or moving to a building "one step below" the one they are currently in. When it comes down to it, they're often faced with a choice. Do I go to "Building A" where the rent is higher and the landlord will build the space to suit my needs, or do I go to "Building B" where the rent is lower, and the landlord is offering a Tenant Improvement Cash Allowance.

This decision at its surface seems relatively simple. What many tenants think, is that the Landlord of "Building A" is just using the space "build-out" as a way to make more money, and if given the opportunity, they could do it themselves cheaper. But is that really true?

When negotiating these kinds of deals, it is critical that the tenant thoroughly compares the options and determines which one really makes the most sense financially, and which one provides lower risk.

The first step in this process, is acknowledging your background and abilities. Let's face it, most real estate decision makers are not experienced architects, project managers, or general contractors. With that in mind, it probably doesn't make sense for your average tenant to take on a construction project, regardless of the size . . . and no, a renovation of your house does not count (unless you had to deal with unions, freight elevator hours, building management, landlord approvals, permits, and fire suppression systems - I didn't think so).

Now, let's assume you thought it through, and even though you know you are probably not qualified to take on the project at "Building B" you still want to give it a go. In this case, you do have a good option, and that is to hire a Project Manager to oversee the project. A professional Project Manager will oversee all aspects of the project, and keep your budget in-tact. But before they can do that, you first need to determine if the project makes sense, and what your budget should be.

The next step is to do some comparative financial analysis. You'll need your Project Manager (PM) and Financial Analyst to sit down and crunch the numbers. The PM will develop a budget based on your hard costs, like demolition, framing, and electrical and your soft costs like the project manager, architect, mechanical engineer, general contractor, drawings, permits, permit expediter, etc. He or she will then meet with your Financial Analyst, and compare that budget to allowance you will receive from the landlord for Tenant Installation and ultimately determine which deal is more affordable.

Now, after all of this work, let's assume that "Building B" looks like the better choice. There is still one more factor that you have to account for, and that is time. The landlord in "Building A" probably uses the same people over and over again to do "build-outs" in the building, and can probably give you a reasonable guarantee of when the work will be done. If you go with "Building B," is the landlord giving you enough free rent to account for all of the time it will take to do the project? What if it takes longer than expected, who's responsible? Will you still have to pay rent and electricity costs even though you're not occupying the space? Have you or your broker negotiated this?

When it comes down to it, comparing these two deals is no simple matter. It is for this reason, that it is critical that you have a trusted advisor that will guide you through the process. Furthermore, you want to have someone represent you, that has all of the services backing them, to make this process as simple as possible. This includes, a Project Management group, a Financial Analysis group, and the resources of a team of real estate brokers that have negotiated thousands of deals and know how to avoid all of the potential pitfalls. With that infomercial, I hope I provided a little bit of insight into a tough decision that faces many tenants.

Still a Landlord's Market for Small Tenants

Despite the economy, your small company is growing and you're ecstatic. Now's your chance, you're finally going to be able to afford a beautiful office in Midtown Manhattan, and you're going to get it for a song . . . right?

Not really, and here's why. As I mentioned in my previous post, the NYC commercial real estate market lags the economy by a few months. Here's what happens - the green text is where we are in the cycle, and the red text is when this cycle will impact small tenants:

1. Large companies start doing poorly
2. Large companies report lower than expected earnings
3. Large companies announce layoffs
4. Large companies put large blocks of sublease space on the market at a price slightly below market
5. More large companies put large blocks of sublease space on the market at a price slightly below market
6. Large companies struggle with their sublease space on the market for a very long time
7. Large companies start making deals significantly below market on their large blocks of space
8. Landlords struggle with large blocks of space on the market for a very long time
9. Landlords start lowering their asking rents on large blocks of space, as they have to compete with the available sublease space
10. Small companies start feeling the impact of the slow economy and delay or cancel growth plans, some companies go out of business
11. Small companies put small spaces on the market at a price slightly below market
12. More small companies put small spaces on the market at a price slightly below market
13. Small companies struggle with their sublease space on the market for a very long time
14. Small companies start making deals significantly below market on their sublease space
15. Landlords struggle with small spaces on the market for a very long time (these spaces have little impact on their bottom line, so they stick it out for a while)
16. Landlords start lowering their asking rents on small spaces, as they have to compete with available sublease space

As you can see, it will be quite some time before the effects of the current economic conditions will be felt by small tenants. It's hard to say how long each one of these stages will last, but my conservative guess is 1.5 months per stage. By this logic, small tenants won't see significant benefit from the current market conditions for about a year and a half (and that's assuming the economy doesn't get better in that time).

Unfortunately, the market is never particularly kind to small tenants, and in-fact once you adjust for inflation, the NYC market has almost never gone down - period. (Please pause for a commercial break) With this in mind, it's critical that as a tenant, you are represented by an expert that understands the market, the players in the market, and the available space. While you can't change the market conditions, there are ways to use the conditions to your advantage to reduce your overall occupancy cost.

What is happening to the economy, and what is it going to do to NY real estate?

For those of you who have spent any time in the real estate industry, it will be no shock to you, that commercial real estate is directly correlated with major economic indicators. To put it simply, if the economy isn't doing well, commercial real estate isn't doing well. That said, this correlation is not perfect. First off, commercial real estate tends to lag unemployment and the economy in general, and secondly, real estate is very much location driven, third - well there are a lot of things that change the game. With that in mind, I've been thinking about what real impact the credit crisis and the economy will have on NYC commercial real estate.

To that end, I've prepared a good and bad list:

Good

• The dollar is weak - driving foreigners to NYC who spend lots of money at retailers and invest in NYC properties
• Vacancy is still very low at around 5%
• No new product - With the exception of the SJP properties tower at 11 Times Square, no new major office buildings will become available until 2012 when the WTC opens
• Most of the market is based on lease expirations, renewals and moves - this won't change

Bad

• The dollar is weak - International tourism will keep NYC prices relatively high and will cause domestic tourism to slow.
• Financial Companies imploding - The heart of the NYC office market are financial services companies and these companies are not doing well
• High availability - While vacancy is still low, availability is going way up. According to Grubb & Ellis research, there are 64 blocks of office space north of 100,000 sf either available or becoming available soon. Many of these blocks are sublets from financial institutions
• Unemployment is going up - Less employees means less space
• Companies are not growing - enough said

First Thoughts

I've never been much of a fan of blogs. I thought, who am I to think that my thoughts are worth reading . . . at least moreso than some reputable authority?

Over the past few years, I've begun reading blogs, and I've realized that those with the most value, or the ones that share some insight into a particular topic. It is with this in mind that I've created this blog. While I don't proclaim to be the foremost expert in NY Real Estate I hope I can provide you with some useful info. on the state of the market and analysis on where things are going.

Thanks for reading. Please share your thoughts, and offer suggestions for future posts.

-MM