“Men who wish to know about the world must learn about it in its particular details”
by Robert Hand, CCIM
Making decisions in commercial real estate often involves more than just calculating a capitalization rate or net present value, because there is always a component of unknown risk. In the office leasing sector, risk is created by local market factors, such as supply and demand for space, asking and effective rents, and absorption rate. Other factors contributing to risk are the specifics of the situation. Learning how to quantify and illustrate such risks to clients is a challenge, especially in small or mid-size markets where office demand can still be somewhat stagnant.
This article discusses how to quantify the risk of a real-life decision: Should an office tenant write a check for $1.5 million to accept a lease buyout offer, or continue to market a sublease for 56,542 square feet of class A downtown office tower space in New Orleans?
As a byproduct of a merger between two large oil companies, a decision was made to relocate 250 employees from New Orleans to Houston, leaving 75,000 sf — four floors of fully furnished class A office space — vacant with an obligation to pay rent at $18.25 psf for 54 more months.
The situation is compounded by two issues: The space represents the largest contiguous class A office space in New Orleans, and with only 54 months left on the lease, it is not feasible for the lessee to offer any build-out allowance. This means the sublease space cannot compete with market-rate space.
The lessor has presented an offer to take back 56,000 sf — three full floors — for a lump sum payment of $1,500,000 rather than the current obligation of $1,022,000 per year. The decision for the tenant is whether to pay the $1.5 million and gain the difference or try to sublease the space to produce a greater income. The dilemma is how to analyze the risk.
The New Orleans class A office tower market is approximately 9,000,000 sf, with 1,000,000 sf currently available for lease. Building occupancy rates range from 73 percent to 97 percent and 2013 absorption was 133,000 sf, or 13 percent of available lease space. Asking rents range from $16.50 to $21.00 psf, including build-out payments ranging from $10 to $30 psf. In competing buildings, 15,000 sf of sublease space is available at $15.00 psf and 90,000 sf was just renewed at $12.50 psf.
The Decision-Making Process
At first glance, the answer appears to be a no-brainer: Accept the offer to pay a lump sum of $1,500,000 rather than pay $1,022,000 annually for 54 months, equal to $4,599,000. However, calculating the numbers on subleasing the space at the average asking rate of $18.50 psf produces a profit of $63,609 for the remaining period. (See Table 1.)
A little about me and my expertise – video
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Investment Properties in Phoenix.
View my listings and my profile at:
Please go to my web-site and get all the newsflashes and updates in Commercial Investment Real Estate in Phoenix and Commercial Investment Properties in Phoenix daily
Check out my professional profile and connect with me on LinkedIn.
Follow me on Facebook:
Follow me on Twitter:
Follow Me on Google+
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial Investment Real Estate Broker in Arizona now for 20 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.
WHETHER YOU LEASE OR OWN
NOW IS THE TIME FOR YOU TO EXPAND, UPGRADE OR INVEST.
we are at on the a rise of the cycle in Commercial Real Estate. so there is only one way and it’s called we are going up and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix. The prices on deals I may get you will not be around forever.
If you have any questions about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us.
Please reply by e-mail firstname.lastname@example.org or call me on my cell 520-975-5207 or Office:480-948-5554
Walter Unger CCIM
Associate Broker, West USA Commercial Real Estate Advisers
7077 E. Marilyn Road, Bldg 4, Suite 130
Scottsdale, AZ 85254
Office : 480-948-5554
View my listings and my profile at:
a little about me and my expertise – video
Delivering the New Standard of Excellence in Commercial Real Estate
- Commercial Real Estate Scottsdale
- Commercial Real Estate Phoenix
- Commercial Real Estate Arizona
- Commercial Investment Properties Phoenix
- Commercial Investment Properties Scottsdale
- Commercial Investment Properties Arizona
- Land Specialist Arizona
- Arizona Land Specialist
- Land Specialist Phoenix
- Phoenix Land Specialist
- Land For Sale Phoenix
- Land for sale Arizona
- Commercial Properties For Sale Phoenix
- Commercial Real Estate Sales Phoenix
- Commercial Properties Phoenix
- Commercial Properties Arizona
- Commercial Land Specialist Phoenix
- Commercial Land Phoenix
- Multifamily land Phoenix
- Retail Land Phoenix
- Industrial Land Phoenix
- Land Commercial Phoenix
- Land Retail Phoenix
- Land Industrial Phoenix
- Land Multifamily Phoenix
- Industrial Land for sale Phoenix
- Land Industrial
- Investment Real Estate
Disclaimer of Liability
The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.