Owners, less aware of the real size of the crisis
Although many spaces are available on the office market, the first half of 2009 is marking a record high in vacancy rates in all real estate classes. Landlords still do not feel as acute as tenants the size of the economic crisis.
“In our dialogues carried out in the current activity on the office segment with representatives of the two categories – landlords and tenants – we find a big difference between their attitude and position. Although at the declarative level there is a common denominator in the fact that everyone recognizes the difficult economic situation, at the practical level tenants already feel the negative impact acutely on their business (perhaps sometimes falling prey to a real obsession with cost reduction far beyond the possibilities of the moment). Landlords are, in fact, much calmer and, for this reason, rigid to tenants’ proposals, because their business has certain inertia in the face of the effects of the crisis (and many unrealistically consider that they will not be affected)”. (Mirela Raicu, ESOP Partner)
Why the crisis hits tenants first
For most rented companies, 2009 began with a readjustment of the business plan. The turnover forecasted against the background of the economic growth from the first 3 quarters of 2008 were reduced to valuations much closer to the realities of 2009. The cost of renting the premises in a healthy business logic must fit between 5-7% of the turnover in the new economic conditions. It acquired a much higher and oppressive share for many tenants, often reaching 12-15% of the turnover. In addition to the unencouraging prospects in the medium term, many companies lack the flexibility to adjust this cost, being caught in firm contracts, they will have to go through the crisis with an additional burden, if they fail to achieve an exit from the contract by sub-lease or assignment, the only existing gate in such contracts.
“For the contracts signed in the period 2007 – 2008, when the rents registered the highest level in the last 5 years, it is unlikely that the sub-lease / assignment can be achieved at the same level of rent, being good to predict a loss in this meaning by tenants, where the level of rent is higher than market values at this time “(Mirela Raicu, ESOP Partner).
In March 2009, ESOP launched a new service called FlexiRent, which offers advice to tenants who want to restore the balance between rental costs and current and projected turnover in 2009-2010.
Affected owners, unaffected owners
For most landlords, the current economic context is not as severe as in the case of tenants. Those who have rented buildings, even with open contracts (contracts from which the tenant can get out or request quite easily the renegotiation of the rent), have not yet undergone a significant wave of relocations, because the tenants still had some reservations, and because a relocation decision involves certain inertia. This means that no significant decrease has been observed in the turnover, as in the case of tenants. Of course, there are fears that this will happen in the second half of 2009. In 2010, a decrease either by renegotiation requests or by the departure of certain tenants.
“Although at the declarative level there is cooperation from landlords, negotiation discussions with tenants are often surprisingly rigid, and therefore it is necessary to call on an external consultant to support tenants’ requests with professional arguments and concrete market examples,” said Mirela Raicu, ESOP partner. The owners who have the spaces rented with firm contracts (as is the case especially for the class A or B + buildings) have even fewer reasons to worry, maybe the only one being that of a possible significant financial impasse of some tenants who will be forced to leave rented spaces.
There are also specific categories of owners quite affected
First of all, they are the ones whose banks have interrupted the financing in advanced stages of the project. However, their number is not large, because most owners have managed to secure by pre-renting enough areas to keep the project moving. Usually, those in this difficult situation are owners who targeted high price levels in 2008, between 22 and 26 Eu / sqm, unrealistic levels even for that year and blamed the non-rental on the fact that the building was not completed, erroneous reasoning, unfortunately.
Another category is the owners who purchased the land at a high price during 2006-2008. Cumulated with the rather high construction costs in 2007-2008, the realistic level of rent in this period increases the risk of only partial coverage of bank rates.
There is a real problem with the projects in which the land purchase price was higher than 1700-2500 EU / sqm and with an average size (4-6 floors). Even if they are located in central areas, the buildings built with bank loans on these lands will hardly cover the monthly installments at the bank if we refer to the level that the rents will reach in 2009-2010.
The crisis passes, the properties remain
No one knows how soon the crisis will pass. “What is certain is that all those who will find ways to relax the positions they had before the crisis will have a much better chance of survival, and the properties will remain with the owners who have carefully managed the relationship with tenants, whether it is about a large or medium property. And for the owners, ESOP offers consultancy in the efficient management of the relationship with the tenants in order to reach the win-win situation, a necessary situation during the economic contraction, which shows its first signs in Romania as well “, says Mirela Raicu from ESOP.