NOVEMBER 2009 Tenant Advisory Robert Lowery & Rick Cagnolatti What You Don’t Office Market 3Q – Leasing Know - About Analytics Snapshot Your Lease OFFICE Robert Lowery & Rick Cagnolatti What You Don’t Know --- About Your Lease --- CAN Hurt You! Houston businesses large and small are in a squeeze play. It’s no secret why – local inflation, lack of financing and economic uncertainty combined with the inability to fully pass along increased costs to customers. With the bottom lines under such universal attack, a growing number of corporations are revisiting lease audits as a tool to cut costs, since rent is typically the second largest operating expense after employee compensation. Landlords, by contrast, seem to have little problem passing along rising costs to tenants. Sometimes, however, they may abuse the privilege. Here are some examples in The New York Times of how successful professional lease audits helped smaller businesses recoup wasted money: • A publishing company discovered it was charged $100,000 for an installation of a new cooling tower, a operating and maintenance expenses by the property capital item that cannot be expensed to a tenant, and an owner. The landlord disputed the finding, and filed a extra $28,000 per year in cleaning costs based on an lawsuit. underreported base-year cost. The company received credit against its rent. The bank’s experience is a reminder that commercial • A textile company, subletting 12,000 square feet, found tenants must pay greater attention to the impact of lease that the primary tenant was allocating disproportionate clauses on their rent bills, particularly initial or base year. share of its own escalations to the company, in which they Most companies cannot afford the time and energy to recouped $175,000. scour their rent bills for overcharges because it is hard enough to run their own business. A lease is a Not all situations have an immediate, satisfactory complicated document that requires the erudition of resolution. An outside audit revealed that Fifth Third industry experts that can catch seemingly minute mistakes Bancorp was overcharged more than $800,000 in ….. that multiply over the years into major losses. Notable: Rental Rates increased 25% from 2006-2008. Vacancy currently on the rise. Notable: Greater Houston did not overbuild office buildings over the span over the last decade. Unlike the 70’ & 80’s. Notable: The third & fourth quarter of 2009 are likely to be the weakest in terms of leasing activity over the decade+. OFFICE Robert Lowery & Rick Cagnolatti Negative Absorption of 370,000 SF in quarter Citywide Vacancy now between 15% & 16% w/ notable mention NW-290 Market hitting 56% vacancy Class B Properties reported 180,000 of vacancy in quarter 46 of 57 Texas Markets reported rising vacancy rates Houston trimmed around 80,000 jobs from Sept ’08 to Sept ’09 which equates to 3% decline year over year Dallas Citywide Vacancy now around 25% Iowa, second on the list, for total capacity. Houston’s total layoffs in 3Q are one-half of layoffs in 2Q Vacancy rates slowing Landlords are not reducing rates to encourage new building prospects; rather concessions TI allowances are being reduced; which will eventually reduce rental rates Experts predict a 25%-30% reduction in office building values in Houston Speculative office projects are almost non-existent Is your lease competitive in the current rental market? OFFICE Robert Lowery & Rick Cagnolatti Will the appraisal ‘fix’ be scrapped? Why do we expect banks to play by the rules when the FDIC doesn’t? Lockheed gets contract close to $1 Billion from US Navy. How much do bankers expect to recover from defaulted CRE loans? Some Houston bankruptcies this week. The TALF program is going to have massive requests next time around. Commercial Real Estate declared worst part of the economy. CMBS spreads are narrowing; Mortgage delinquencies are climbing. A staple for commercial real estate land & development deals, Sterling Bank now struggling. How have REITs been successful in this CRE meltdown? Access to capital. Architects seeing stabilization in billings; still underperforming a ‘healthy’ scenario. It looks like TARP may be coming to an end. October Willis of Texas subleases space in Memorial area. The U.S. started the collapse. Could Asia be leading the recovery? 19-23 Forecasts are meant to be broken. Here is a medical office 2010 outlook. CRE troubles are still awaiting Wells Fargo. Dynamic Offshore purchases production company focused on Gulf of Mexico shelf. And you thought establishing value on your property was hard? Houston ranks 4th nationally for ‘recession-proof’ retirement cities. Pfizer laying off 19K after digesting Wyeth. The head of the Bank of England is calling for the breakup of some of the world’s biggest banks. Texas remains #1 wind state, more than doubling Iowa, second on the list, for total capacity. han doubling Iowa, second on the list, for total capacity. Need a 40% rent reduction for total capacity. Iowa, second on the list,for your office lease? Maybe the building will go back to the lender. Bridgeland: Northwest Houston community back from the dead. Banks that want to grow apparently won’t be looking to commercial real estate. Englobal opens business unit to attract new government work. A Northeast HUB for industrial space, Northern New Jersey, has seen sublease space hit a six year high. KMG Chemicals will work with Animal Health Company to promote animal products. $55 billion in mortgage servicing writedowns has hit the 4 biggest banks, including JP Morgan. 2010- Flat predictions for the defense spending sector. Capmark may finally file for bankruptcy. 4 of 5 of the best labor markets are here in Texas. October One visionary fund is taking advantage of Rio being named host to the 2016 Olympics. Manhattan building sales off 92% from same date, 2 years ago. 12-16 Corporate real estate departments are downsizing, outsourcing, and reorganizing. City of Houston asks NRG to build solar. Stop the presses! CMBS delinquencies hit a record high in September. Baker Hughes pares accounting clerks and credit analysts. With the Corus bank assets acquisition under his belt, is Barry Sternlicht just getting started. Affiliated Computer Systems hiring call center employees. With credit markets still in flux, small deals are the ones getting done. We’re not the only ones worried about CRE, the Fed is too. Are improving equity markets evidence of the sort of fundamental economic strength that will catalyze a rebound in CRE? The federal government is trying to encourage workouts on commercial real estate loans. Office and Retail REITs have taken a hit, but Infrastructure REITs will play a pivotal role in economic growth and may do well as a result. Tenant Representatives… We represent your interests. Landlords pay our fee.