Already diminished leasing activity will weaken further in the months to come, at least through 2009, as core office users in the finance, insurance, professional and pharmaceutical industries reduce staff and occupancies in response to the most dramatic economic downturn in decades. In a market already struggling with high vacancy rates, declining rental rates and increasing unemployment, a tenants’ market is at hand.

Companies are shedding more space, and vacancy rates are forecasted to continue to climb. Rents are heading down, and will continue to fall, before leveling off. Venture capital investments have dropped substantially, and the commercial mortgage-backed securities markets are closed. Sales in commercial real estate have declined over 60% this year. Limited trading is expected as the credit crisis continues to severely limit the availability of financing. Limited new inventory is expected, with relatively few existing construction projects, and virtually no new building anticipated.

The effect on commercial real estate will not be as pronounced as it has been on the residential side, with the exception of some properties that are overleveraged and losing value. Furthermore, it will take time for commercial property loans to mature through the end of this decade and then face the difficult credit markets. While defaults will not be as severe as in the residential sector, it remains to be seen how high default rates on commercial mortgages will go.

So what is our advice to tenants during these unsettling times? Be deliberate and strategic. Indeed, companies can find a silver lining in today’s volatile economy if they do the following:

Exercise greater control. A tenants’ market gives companies more leverage in dealing with landlords who desperately want to hold onto credit-worthy tenants. Tenants should keep this in mind as they consider negotiating new lease terms like rental rates and expiration rights, as well as new tenant improvements and additional concessions.

Protect the bottom line. Now more than ever, it is critical for companies to preserve their assets and cut costs. Real estate remains the second greatest corporate expense, following payroll, and the risks abound. In considering cost-saving measures, tenants should note that proper, unbiased guidance from a qualified tenant representation firm will save them money and protect their interests.

Think strategically. Another way to save in the long run is to make upfront investments in strategic planning, allowing companies to reconfigure their space and improve productivity. Companies with leases approaching expiration should determine which assets they want to retain, sublet or let expire, and make sure that their decisions on short- and long-term leases are aligned with their business plan. This is particularly important to companies that may need to downsize or “right-size.”

Ask about conflicts of interest. Brokers from traditional firms (which represent tenants and landlords) cannot adequately serve two masters and avoid conflicts of interest. Especially in this environment, tenants need to ensure that their advisor is putting their interests first. To be sure, tenant representation firms and traditional firms are colleagues that work together. But the tenant representation model is gaining traction during this challenging economic time as companies realize how much is truly at stake. We encourage companies to perform their due diligence in selecting a brokerage firm. Finally, we believe that advisors who can negotiate aggressively on behalf of their clients, without fear of repercussions from landlords, are best positioned to capitalize on today’s market opportunity.

Doug Haynes is managing principal of CresaPartners’ Paramus office. The views expressed in this article are the author’s own.

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