Many industry experts are predicting 2010 as one of the best year’s for tenants in a long, long time. Why? Because as more commercial properties exchange hands (whether through foreclosure or preemptive moves by distressed owners/banks) the cost basis for new owners will be significantly lower than for the previous asset holders. This will, in turn, push rents down as new owners no longer have such high cash flow needs to cover the debt on the building, called the Debt Coverage Ratio or DCR. This is a comparison between the monthly income of the property and the monthly debt payment on it. If the debt is lower, then the monthly income can be lower.
The escalating prices of an overheated market caused the value of commercial loans to rise dramatically over the last 3 years and thus drove up rents as the income on buildings had to increase in order to cover operations plus the cost of the loan. As scores of owners walk away from their investments over the next year or two, banks will be forced to put up properties for sale at much lower prices than in 2006-2007. Lower purchase prices, means buyers will be in a much healthier position to build a good tenant base through competitive rates and still meet their obligations as well as see a return on investment (albeit a much smaller return these days).
For landlords who can weather this transition and hold onto their properties, they face the dilemna of lowering their rents in order to be competitive. While several owners already have a low cost basis and can be aggressive with rates (have owned their properties for a long time), others (who have purchased in recent years) will be facing losses for a period of time while they either (1) cut their rates and actually lose money on the front end or (2) hold on rates and see little leasing activity as a result.
The message here is take advantage of these unusual market conditions if and while you can. If you have a lease expiring within the next two years, you may want to start looking at the market now and exploring your options.
