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What Goes Around, Comes Around

There are countless analogies to describe what’s taken place in our local economy in recent months, some of which are authored by of all “people,” Mother Nature. The one that immediately comes to mind is the comparison between the winter freeze that kills off the sick and weak with the economic chill that is beginning to set in across our land that is forcing many companies to downsize or shut their doors.

As much as I’d like to, basic civility precludes me from getting into other nature-oriented analogies that deal with vultures, jackals, and other scavengers because they so closely resemble many of the local human and institutional critters who have preyed upon our economy, especially in the office space habitat. Nor should I identify the specific real estate operatives in San Diego whose “take-it-or-leave-it” posture is chillingly similar to the bullylike behavior of a hell-bent grizzly bear on the rampage.

It is fair to say, however, that our local office space market has been largely dominated in recent years by individuals and organizations whose behaviors closely resemble the just-mentioned creatures. As the real estate market begins to hunker down for however chilly the economic climate will become in coming months, many of these creatures will either perish or undergo Mother Nature’s process of “natural selection” in which they must adapt to the changing environment in order to survive. That’s good news for office tenants who have long been denied a level playing field in the leasing market and who need a champion to bring about a free market environment.

What goes around, comes around. Just as there is an eventual balance in nature in which only the strong survive, our moral code promises that good will eventually triumph over evil. In other words, along with the weak and sickly, the bad guys lose as well. It’s become increasingly clear in recent weeks that there is soon to be a restoration of balance and equity in the real estate leasing environment in which the notion of competition and customer service means the good guys will indeed win in the end.

It’s a crying shame that it takes economic adversity to set things right. But the abuses on the part of some landlords, building managers and bully brokers representing those parties have been so severe that it appears nothing short of a major downturn will alter their behaviors. These folks are not weak and sickly; they are intent on surviving. But they are having to alter their behaviors in order to do so.

Just some of the abuses endured by tenants and their brokers include: “This space is ‘as is’ — take it or leave it.” “No, we’re not offering any tenant improvements.” “If you don’t commit to take the space today, the rate goes up.” “Hey, we’ve decided to lease the space we’ve been talking to you about to someone else for more money. Sorry.” “By the way, we’ve decided not to pay you your commission for bringing us the tenant.”

In days gone by, tenants and their brokers were forced into bidding wars jut to secure a site. Rental rates jumped from $1.75 per-square-foot to $4 in just four years. In that same period, tenant improvement allowances decreased as dramatically as space rates increased. And as if these conditions weren’t onerous enough, tenants were forced to provide landlords with letters of credit and enormous security deposits just to have the privilege of leasing space at outlandish rates.

Those companies that have suffered economic setbacks and reverses are, in effect, paying the price for restoring economic balance. The technology-oriented suburbs of Sorrento Mesa, Carmel Valley, and the Golden Triangle have been hit severely. With so much space suddenly coming back onto the market almost on a daily basis, it’s hard to keep track. There is presently more than 500,000 square feet of sublease space available in Sorrento Mesa alone.

Companies with major subleasing inventories include Gateway, which is trying to sublease three buildings of nearly 200,000 square feet in the Golden Triangle area. Copper Mountain Networks has 80,000 square feet available, Compass Learning, 75,000 square feet, and Alaris,70,000 square feet. Additionally, there are dozens of smaller subleasing opportunities newly available.

This sudden infusion of available space for lease is having a chilling effect on many landlords and their gangs of incompetent property and asset managers and clueless leasing agents who must now start thinking collectively about how to be reasonable and polite in order to attract tenants to their badly maintained office buildings. Fortunately, there are the good ones mixed in with the bad. There are, in fact, many who really do understand market competition and know how to do a good job for both the building owner and their tenants. We need to multiply their numbers, however. It is my hope that they will set the example for colleagues needing lessons in civil behavior.

However, therapeutic the beginnings of an economic downturn may be in curing the abusive practices on the part of some in the office leasing market, I worry about the effects of a continuing downward spiral. What ultimate effects will a retrenching service sector have on the region’s overall economy? What about the near-staggering losses being suffered in the equity markets? What happens if these and other developments produce an overall economic climate so chilly that the available sublease space will go unoccupied and we find excessive vacancy rates in our office space inventory?

These are questions that need to be kept in mind as we continually monitor the economy and, as a city, take whatever measures are available to us to stimulate the business environment.

Meanwhile, those suburban market tenants whose leases are rolling over in the next 12 months should put on their negotiating bibs. It’s soon to be dinnertime.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.



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