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Tenant Abuse: Chapter 2

If there was any question of whether the perils of office tenant abuse was an appropriate topic for a column in this newspaper, it’s been answered multiple times over since that article appeared several weeks ago.

Quite frankly, my chief regret is that I didn’t bring up the topic sooner, given the number of letters and phone calls I’ve received from office tenants who identified with one or more of the several plights described in the column. Even the squeals of protest from those landlord brokers who are still struggling with the notion that tenants should be treated as valued customers have reinforced in my mind that the topic not only was timely but that it is far from being discussed in full.

But, let’s be fair. Several calls I received were from landlords who, in fact, do treat their tenants properly but who expressed concern that they were being painted with the same brush as those owners and managers who are the problem.

This leads me to proclaim the obvious: There are many office building landlords who do value their tenants as customers and treat them fairly. They create value for their tenant customers and, therefore, are entitled to a profit. Since they play by the rules in our free market society, they should reap the benefits from doing so.

All of us — landlords, lenders, tenants and brokers alike — know the real estate market is cyclical. There are good times and there are bad times. Even in the good times, real estate development is a risky, risky business. Developing and owning real estate as an investment or income commodity is not for the faint of heart.

But we need to keep in mind that being an office tenant is risky business, too. Tenants work in businesses and professions that are cyclical as well. They are subject to the same economic vagaries as developers, some even more so. They are impacted positively and negatively by a growing complexity of financial and social interactions. Many, especially those in our local high-tech economy, are especially susceptible to instant obsolescence as a result of today’s rapid changes in technology.

My point is this: Being alive and in business today is risky for those who build and manage commercial real estate and for those who lease space. If a landlord provides value-added resources to a tenant, he should be rewarded accordingly with a reasonable profit. If, on the other hand, a landlord takes advantage of a tenant and creates negative value — as is all too often the case these days — he should be shunned and denied any return on his investment. In school parlance, he fails free market economics and deserves an “F.”

It ain’t rocket science, folks, it’s plain vanilla economics and marketing principles at work.

On To Other Things …

Given the football ticket-guarantee debacle, it’s good to be able to give our city government three cheers for fiscal stewardship in at least one area. While office space costs for municipal governments across the nation have increased 23 percent over the past five years, the city of San Diego’s occupancy costs have remained virtually the same in that period of time.

How can that be so? For one thing, the city, in recent months, has signed 15-year leases for about 350,000 square feet of office space in two older downtown office buildings, resulting in a net effective rental rate of less than $1.50 per square foot per month. (The Irving Hughes Group has represented the city in its office leasing needs for the past several years.) This, despite the embarrassing state of the City Administration Building and the plight of city employees and elected officials who have to work in “Class C-minus” office space. It’s been clear for some time that our city’s leadership has resisted the temptation to build new facilities for city government in favor of other priorities such as a downtown ballpark, a new central library, new sewer facilities, etc.

Would that the federal government follow the city’s example. The fed’s landlord, the General Services Administration, routinely pays rents well above market rates for spaces in our local office buildings. It’s somewhat akin to the $600 per ashtray scam perpetrated on the military by defense contractors a few years ago. The net effect of the GSA’s willingness to pay bloated rents is that tax dollars are subsidizing other tenants in those buildings who are not paying the exorbitant rental rates for comparable space.

I’m the last person to begrudge office tenants getting a good deal, but I can’t help but wonder how many tax dollars could be saved if the federal government used tenant brokers to negotiate office space in privately owned buildings. To roughly paraphrase the late Sen. Everett McKinley Dirksen: “A few million dollars here, a few million dollars there, and pretty soon you’re talking about real money.”

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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