Commercial Real Estate

Is "Flat the New Up"?
Several trends became clear in reviewing the 2009 year-end market statistics for commercial real estate across all market segments (retail, office, industrial and multi-family):
1) Over the past four quarters the rate of declines in lease/rental rates, vacancy rates, space absorption, etc has stabilized with vacancy rates in particular holding firm over the past three quarters. As you might imagine, vacancy rates drive rental rates, sales prices and rent concessions based on the simple principle of supply and demand - as vacancy rates increase, supply increases driving pricing down.
2) Overall activity across all markets has been down, although the second half of 2009 was considerably better than the first half, showing positive momentum in activity coming in to 2010. The vacancy rate increases in 2008 were driven by several factors; construction projects previously approved were completed, adding to inventory; we saw a large jump in tenants leaving the market with very few offsetting tenants entering the market; many tenants downsized or optimized their spaces to meet their current levels of demand, placing additional space on the market. By the second half of 2009 these trends started reversing; construction projects were non-existent, tenants slowly started reentering the market and most companies had already downsized their facilities.
3) Financing and in particular loan-to-value ratios remained challenging for acquisitions; in particular investment acquisitions or refinancing of investment properties was dismal.
So, if "Flat is the New Up", which appears a reasonable conclusion assuming all of the above plus the assumption that the recovery is as slow as most pundits predict, what is the best approach to commercial real estate sales and leasing?
Leasing - several strategic recommendations result from the above conclusion - if you are committed to a lease with time remaining the next few months is the ideal time to approach your landlord to renegotiate the terms of the lease. In particular if the space is well suited to your long-term needs a win-win solution may be a "blend and extend" whereby the landlord offers to reduce the current rental rate while the tenant agrees to extend the term or length of the lease guaranteeing future cash-flow for the landlord. If your lease is at or near the end of your term there hasn't been a better time to lease than the present. Don't renew at your prior rate or exercise an option without the benefit of a market rent survey of current asking rents. Seek professional help - the benefits will stay with you for the term of your lease and may be significant!
Sales - if you are in a position to purchase commercial real estate, either your existing facility, a new facility or even as an investment it is difficult to imagine the timing getting much better. Given that all signs point to being at the bottom, even if we stay there for a while, there are no economists predicting that interest rates will drop anytime soon. If interest rates do increase, having a property secured by a long-term fixed rate at today's low interest rates make any short-term increase in values irrelevant in the long-term.
As a landlord you are best served by holding on to any existing tenants or offering aggressive lease rates for shorter term leases. Maintaining cash-flow is critical to survive through the end of 2010. If you are underwater and are forced to sell there is plenty of cash on the sidelines - but let the seller beware, most of the money is in the talons of the vultures circling above.