The largest capital portion of any office lease is the initial outlay of cash for tenant improvements, and almost without exception, tenant improvement dollars are provided by borrowed funds. The typical large-pocket financial instruments which support commercial real estate loans of any sort are known as Commercial Mortgage-Backed Securities (CMBS). These securities represent the ability of banks to spread the risk of loans, yet the $200 billion annual CMBS market is presently seized up, and could virtually eliminate access to cash for the commercial real estate sector. While default rates of these commercial real estate backed securities loans is just an amazingly-low .047% and commercial mortgages in life insurance portfolios are a tiny .03%, the panic among lenders and their institutional backers is freezing access to this stable, creditable and highly secured sector of real estate.
Office leases which require massive injection of cash will feel the crush of the landlord, although creditable and secure, unable to secure the necessary cash to finance the tenant finish. Without the construction to accommodate new tenants, the commercial real estate sector, and landlords would crash. Creditability of the tenant will get tighter scrutiny as lenders will be looking beyond just the landlord or the underlying value of the real estate as security, but directly to the stability of the tenant (and even the tenant's own industry!) for the financial stability. Even with well qualified, or perfectly qualified tenants, the financial markets may simply not extend themselves if the underlying CMBS is frozen.
This would result in many fewer office lease relocations while tenants attempt to weather the financial market storm by remaining, expanding or renewing while not forcing the existing landlord to cough up tenant improvement dollars. Smaller expansion projects would not require massive cash, and tenants themselves may be required to pay for improvements with their own operating capital.
If the frozen CMBS market remains frozen for a lengthy time of several months, this could lead to failures of new real estate projects, or, even worse, to the loss of existing commercial buildings as landlords are shut out from securing needed tenants.
Image: a major office project with a 100,000 vacancy that when filed would complete a profitable project. But it would take $5,000,000 in tenant finish and fees that are not available by commercial banks or insurance portfolios, rendering the transaction dead.
The loss of construction projects and those construction jobs alone would have a ripple effect throughout the economy.
The credit markets must be permitted to have confidence. Fear now obstructs access to needed cash.
Without a swift and conclusive end of the present credit crises, commercial real estate projects across the nations could be in peril.
Christopher Desloge is a three-decade veteran tenant representative in office leasing, authoring The Tenant's Guerilla Guide to Office Leasing and publishing the website officetenant.com. Mr. Desloge is Chairman of the Tenant Rep Agency, LLC specializing in office tenant representation throughout the US. The Tenant Rep Agency, LLC has teamed with HOK, the largest architectural firm in the world to provide office leasing tenant with tenant representation brokerage services coupled with space planning, tenant development, construction drawings and construction administration all at no cost to the tenant. Tenant Rep Agency website is http://www.tenantrepagency.com
