I am very fortunate to be serving as the Chair of the National Association of REALTORS , Real Property Operations Committee. They are the committee that oversees the leasing and management of NAR’s buildings. Our association owns four buildings – our Headquarters on Michigan Avenue in Chicago along with the adjacent restaurant building on Rush Street, our DC Headquarters, and a bulk distribution center in Cincinnati that houses NAR’s lockbox company, Sentrilock. It’s a small committee of ten people, of which three of my committee are past NAR Presidents, two are past Treasurers, and the current Treasurer of NAR.
What has been interesting for me has been the exposure to other commercial real estate markets. It has been a great education and has helped me gain a better perspective on commercial real estate in Kansas City. For the past five years I have been extremely jealous of the Washington, DC office market. They had very low vacancy while also maintaining high rents. This was at a time that the rest of the country was in a commercial real estate recession.
So what happens when a market the size of DC has low vacancy and high rents? Good old economics take place – low supply, high demand, and people saying, “let’s build an office building!” This led to multiple developers deciding to build big office buildings, or redeveloping big office buildings, so you have a big increase in inventory.
Then what happened? The government started to cut back. They needed less office space. Law firms that work with the government started to cut back as well. Softness has hit the DC market at the same time that the rest of the U.S. office market is recovering.
So the market has switched from a landlord’s market to a tenant’s market. Tenant rep brokers are going after sizeable tenants in the DC area, and taking them to the market way in advance of their lease expiration. They will pay the remainder of a tenant’s lease and not receive any rent for several years on their building, with the future prospects of cash flow.
So what has this taught me? One thing I have always known in my own properties is that it’s better to keep an existing tenant than to get a new tenant. Maybe they need a little rent reduction, or some money to spruce up their space, but believe me, it’s the best thing to do financially. Also, it has taught me you can be overleveraged in your loan. Equity is so important to have in a property, so that when there is a downturn you can withstand a reduction in cash flow.
Something equally as important is maintaining the property in the midst of decreasing vacancy. Don’t let maintenance get put aside because your cash flow is down. Updates will encourage current tenants and discourage future tenants. And yes, the old adage is true, “all real estate is local.