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WASHINGTON, DC-As unemployment rises, so do office vacancies; companies either go out of business or, at best, do not expand as they might have in better times. That is how the story is traditionally told in the CRE community, with the tenants cast as the source of the economic distress and the landlord urged to increase credit monitoring and due diligence of their prospective–and even existing–office dwellers.

This particular cycle, of course, is no different–and in fact is proving to be more painful than many had originally expected–both anecdotally and on a quantitative basis.

Indeed, the unemployment figures that came for March represent another high water mark for economic distress. A net total of 663,000 jobs were lost last month, causing the unemployment rate to jump to 8.5%–its highest level since late 1983. Altogether the economy has shed a total of 5.1 million jobs since December 2007–when the recession began–most of them over the last five months.

Dennis Russo, a senior partner with the commercial real estate group of New York City-based law firm Herrick, Feinstein, tells GlobeSt.com he is seeing a marked increase in the number of tenant requests to surrender their space. “There are more requests for entire surrenders than partial surrenders, and that arises largely from the loss of office jobs nationwide.”

To the extent that owners have corporate tenants with assets, the owners are not simply accepting the surrender. “It’s surrender plus dollars,” Russo says. “One confounding variable is that to accept surrender offers, owners must get the consent of lenders or special servicers, and those aren’t easily forthcoming.”

Rising unemployment, however, raises tenants’ hackles as well. In general tenants do not want to be in a building where the ownership suddenly trades hands; service disruption and maintenance could become issues. More directly, tenants stand to lose money with a financially troubled building owner, Michele Browne, managing director of Howard Ecker + Co.’s New York office, tells GlobeSt.com. “If the landlord is going to build out a space for a tenant and provide it with financing for that build-out, then the landlord credit is going to have an impact on whether that build-out gets done on a schedule that works for the tenant–or gets done at all.”

Also, she adds, if the landlord becomes insolvent and the ownership of the building changes hand there is a possibility that the security deposit could be lost. Well aware of all this, tenants have been taking steps to protect their interests, starting with a rigorous due diligence process, as they decide whether to renew space, and ending with stringent requests for financial disclosure and protection. Especially throughout Q1, Steve Pumper, executive managing director of Transwestern’s Investment Services Group, “we have seen more tenants ask about the building’s sponsorship,” he tells GlobeSt.com.

If the building owner is a public company, a tenant will scour public filings, Tom Fulcher, EVP and branch manager for Studley’s Washington, DC office, tells GlobeSt.com. If it is private, they ask to see the financials of the building and the overall entity. Tenants are not just looking at numbers, Fulcher continues, but also ownership structures. Even if a building is part of a portfolio, it still could be owned in a separate entity and the owner could make a decision to let it go, he says.

“Some tenants are making lease transactions contingent on certain levels of financing closing. Also, asking for TIs or commissions to be escrowed has become commonplace–and most landlords are happy to comply.” Or if [landlords are] not happy, then at least resigned. “I have heard of tenants telling landlords they will not tour a building unless it is understood upfront that the TI will be escrowed,” he says.

If a landlord is not willing to–or cannot–escrow the TI, there are other ways to structure in some safety for the tenant, Phillip Thomas, managing director at Cassidy & Pinkard Collliers, tells GlobeSt.com. Leases can be written so that if a TI is not made available in a certain amount of time the tenant’s rent can be waived, he says. “There are a number of ways to secure those obligations.”

Whether such demands will disappear when the economy recovers or will become a permanent fixture in the CRE landscape remains to be seen. But as the industry examines the macro data for signs, some are finding hints that the answer may come sooner than expected.

The DC area is still producing jobs, Thomas notes–and in office-related sectors, such as government and health care. Retail and construction are the sectors of the economy that are suffering, which traditionally do not occupy office space. This imbalance is almost a net plus for the DC area office market, he says.

For his part Russo reports a sense of a mild uptick in confidence, “which could result in hiring, which would result in lower vacancy rates and stabilization of asking rents.”

He points out, “It’s impossible to call an exact bottom and it’s more art than science, but we have recently noticed–and our tenant and owner clients tell us they have too–that the gloom and doom may be giving way to stabilization, which, we hope, will give way to increased activity.”

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