ABJ: Austin CRE market has tenant fever
Jan 6, 2011
http://www.bizjournals.com/austin/print-edition/2011/01/07/tenant-fever.html
Prospective commercial real estate renters seeking good deals should look equally hard at mitigating their risk, with an eye on learning from history, an analysis by a local real estate firm executive recommends.
Austin, which many national real estate experts expect to recover from the downturn sooner than most metro areas, will be seeing a lot of spaces and leases changing hands in 2011. This area has seen several companies move here, with more on the way, while many local companies are looking to upgrade their spaces.
All that moving around has Jay Lamy, a principal at AQUILA Commercial, encouraging space seekers to consider the differences between the two most recent real estate slumps — following the tech bust and the credit crisis. Although there are similarities between them, the differences in their underlying drivers mean tenants should be much more concerned with how to reduce exposure to a landlord’s shaky finances.
Losing one’s landlord as a result of foreclosure is a chief risk to a tenant’s stability, Lamy said. Without certain protections in a lease, such an event could result in unexpected rental rate increases, lack of management or refusal to follow through on promises — such as amenities — made by the prior landlord.
“Now is a crucial time to compare and contrast the two most recent real estate cycles,” Lamy said. “If the goal of tenants during the previous recession was to get a good deal, the mantra for this cycle needs to be ‘mitigate your risk.’”
Austin’s last real estate downturn was based on tenant overconsumption as too many dot-com companies thought they were going to be the next big thing, and overfed their appetite for desired growth, Lamy said. When the level of anticipated growth didn’t materialize, an enormous amount of space went on the market. But back then there was enough money to bridge the gap until the next growth phase.
That next growth phase, however, ended with this recession, which stemmed from the credit crisis that saw a lot of lending, followed by very little lending when regulators clamped down on banks.
Now, lenders are getting aggressive with landlords in default. Foreclosure postings of commercial real estate in Austin are up 13 percent compared with the previous year, according to Foreclosure Listing Service. From January through November, there were 951 foreclosure postings filed on commercial properties in the Austin metro area, compared with 838 for the same 11-month period last year.
“Lenders have recently started foreclosing on a number of local assets, and we anticipate more will follow suit before the market turns around,” Lamy wrote. “This leaves many wondering what strategies lenders will take as they assume their new role as landlords, and what impact it will have on tenants.”
There were 36 office building foreclosure postings during the first 11 months of 2010, up from 18 during the same period in 2009 — a 100 percent increase. Office projects that reached the foreclosure docket during 2010 include Travesia Corporate Park and Frontera Vista in Round Rock, the River Place Corporate Park, Ladera Bend, Northview Business Center and the Parkway at Oak Hill.
The office building at the stalled University Park development on the former Concordia University campus was reclaimed after the project’s lenders, Texas Capital Bank and U.S. Bank, foreclosed on the eight-story building in June. The banks said it soon will be for sale, but that has put its tenants in limbo.
But once a building emerges from foreclosure as Ladera Bend did, new tenants will be sought. Ladera Bend is the first office building of its size to go through the entire foreclosure process and emerge with a new, nonlender owner. In December, a partnership of Austin-based HPI Real Estate Services & Investments and Sarofim Realty Advisors, a Dallas pension fund adviser, bought the 161,000-square-foot office project from Wells Fargo, which repossessed it in 2009.
Regardless of whether a property was in foreclosure or never threatened, the paramount principle in Lamy’s analysis is that each tenant get to know a potential landlord’s lenders and ensure it has protections included in a subordination, nondisturbance and attornment agreement. And negotiating with multiple properties also safeguards against risk.
“This time around, it’s wise to get as best an attorney as you can because most brokers, who can suggest language, still don’t practice law in court, and that’s where these disputes will be headed in these situations,” said Greg Marberry, a broker at CB Richard Ellis.
Lamy said that while research shows positive signs toward a market recovery, tenants shouldn’t rely on that and solely look for deals.
“In the event we face a situation where we see a double-dip recession, the Austin market will certainly not be immune from it and could face additional deterioration in value,” Lamy wrote. “The ability for tenants to get a good deal in this market will not be as easy as it was in the last economic downturn — and will be defined far more by lessened risk.”
