Office real estate deal pipeline looking better

Brad Carlson

Debbie Martin, president of the Idaho chapter of the Society of Industrial and Office Realtors, maintains a positive attitude about an office market that remains sluggish but offers some opportunities.

She is “taking the market we have and dealing with it,” she said. Instead of waiting for conditions to improve, she’s staying proactive when it comes to finding and pursuing deals, and trying to put herself in the shoes of clients or prospective clients. She had more planned and expected deals in the pipeline as of the first week and a half of 2010 than she did during many periods of 2009, she said.

Martin is seeing office users occupy older space, and landlords offer reduced rents to fill vacant spaces. Lease terms have been shorter recently, she said. Often a tenant whose lease is about to expire will relocate to get a better deal.

Developers of new space often have incurred costs that limit their ability to offer rents that compete with those available in older buildings, Martin said. Most of her deals have involved moves into previously occupied office spaces, although there is leasing activity in new office space. Businesses that are moving into new space, she said, include creditworthy owner-occupants, well-established companies that are financially strong enough to make a five-year lease commitment, and medical businesses – which often are more location-driven than rent-driven in their facility decisions.

Leasing is DK Commercial’s main activity now, given that financing remains very tight for prospective owner-occupant buyers, according to Martin and to Jeffrey Hall, an office and retail property agent at DK. Some tenants have inquired about renegotiating leases in light of falling revenues, Hall said.

Banks are showing some appetite for investment properties that are occupied by strong tenants, and for buildings that are majority-occupied by an occupant who used U.S. Small Business Administration 504 financing in which the lender and the SBA share risk, they said. Hall said landlords are taking a hard look at the financial situations of prospective tenants, and that bare land remains very difficult to finance.

For income property opportunities, capitalization rates of return “still need to be fairly high for investors to jump” and many prospective buyers want “better than good deals,” Martin said. There is a perception that more properties must be taken over by banks before the market is at bottom, although the market continues to have sellers who have to sell, she said.

Appraisals remain a challenge in that many of the comparable-property sales used to help determine value are foreclosures or are short sales, Hall said. In a short sale, the lender accepts as full payment less than the amount owed.