Houston's Office Tenant Letter - February 2010


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This is our February edition of the Houston Office Tenant Newsletter.

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Houston's Office Tenant Letter - February 2010

  1. 1. Need assistance with a renewal, renegotiation, relocation, or subleasing of your space? We are Tenant Representation Specialists. We represent your interests, not the landlord’s. OFFICE Robert Lowery & Rick Cagnolatti FACING OVERAGE$ WITH MARGINS UNDER ENORMOUS PRESSURE, commercial tenants are looking for ways to shave dollars on one of their biggest expenses--real estate. Some are pleading with landlords for emergency rent relief. Others are taking matters into their own hands by hiring lease auditing companies, from specialists to the Big Four accounting firms. Lease audit requests have almost doubled in major metropolitan cities in 2009. Operating expenses on leases, which may have been overlooked in the past, are now being challenged--aggressively. Often, those challenges are successful. Around 75% of the exams uncover overbillings or incorrect charges. Tenants are increasingly disputing such things as the level of landlord management fees and the tendency to sneak capital expenditures--the landlord's responsibility--into operating expenses, which are shared with tenants. In addition, auditors are uncovering overcharges via adjustments that stem from slumping occupancy levels. Many of the overbillings are simply matters of the escalations not conforming to provisions in the leases negotiated at the time of signing. A building with 30 leases can have 30 individual lease clauses and most landlords take a 'one bill fits all' approach to charging for operating expenses. More difficult disputes arise from billings that depend on how expense provisions are interpreted. Items like capital expenditures or outside management fees have a tendency to be reinterpreted by landlords and filtered back into operating expenses. Then there are the less innocent mistakes. We are aware of cases where after years of steady escalations to cover common areas, the square footage tenants are being charged for is so large it would ‘extend into the middle of the street’. While these are few, watch out for this type of creativity. Sometimes lease auditors are the best bet. In return for that help, contingency-fee lease auditors typically get anywhere from 25% to 50% of the overcharges recovered. IN THE FACE OF THE WAVE of successful--from the tenants' point of view--lease audits, landlords are fighting back. They are adding contract clauses that discourage audits. Sometimes, leases are written to deny tenants the right to audit. Or in other cases, they stipulate the tenant may have to respond within 30 days of an annual statement or lose the right to challenge. Other landlords are adding clauses that allow tenants to hire only CPAs from the major accounting firms or fee-only auditors, thereby excluding the specialists who work on a contingency basis and are seen as more aggressive. Smaller tenants especially have to face the risk of having the audit cost more than [the overcharges] it uncovers. Finding an overcharge may be more likely than many landlords would prefer to believe. Estimates are audit firms are able to get modifications of overbillings in more than 90% of the lease audits.
  2. 2. Need assistance with a renewal, renegotiation, relocation, or subleasing of your space? We are Tenant Representation Specialists. We represent your interests, not the landlord’s. OFFICE Robert Lowery & Rick Cagnolatti DAILY HEADLINES ON LEASINGHOUSTON.ORG Exxon Mobil is considering a move Johnson Space Center looks to Return to the Moon cancelation with concern Toshiba Launches Super-Charge Ion Battery RPT-TEPCO mulls stake in NRG Texas nuclear plant ConocoPhillips launches PP business B&W to support sub nuke systems Insurance industry says Ike damage cost 12 billion dollars in Texas Major change at NASA: Houston may have a problem KBR scuttles West Houston expansioninstead. … Toyota owners besiege dealers for answersof eight … Port of Houston approves $1M in Bayport projects City slow to tear down vacant buildings Mall makeover for West Oaks Mall Texas Steel Processing sold to Chicago metal distributor Hard times wash away part of Houston port’s income Oil work in Iraq could ramp up CompUSA re-entering Houston as Systemax unit Education Pioneers Launches in Houston to Recruit, Train 100 New Education Leaders Investors target Marcellus Shale drillers Baker Hughes 4Q Profit Falls 81% On Weak Demand >BHI Energy markets show little reaction to oil spill AttainResponse Selects The Planet for IT Infrastructure Hostingchosen the company … Chevron, Statoil Confirm Buying Devon’s St. Malo StakeHalliburton 4Q Profit Drops 48 Pct Winter chill returning to Houston in time for weekend Suits against Houston fitness centers give lawyers workout Crews try to protect wildlife from Texas spill For-profit colleges spur dreams and doubts Devon Energy’s Partners Push Maersk Off US Gulf Oil Deal Schlumberger CEO: Sees Increased Service Activity In Iraq Houston’s unemployment rate edges up Port of Houston loses long-running contract lawsuit Planned Uptown rail project requires more land KBR to offer BP resid hydrocracking process Houston scientists awarded millions in cancer grants Heart pump developed in Houston approved by Houston Conoco To Reorganize Its Global Oil, Gas Trading Group Houston’s Endeavour International coming to Denver Chevron plans downstream restructuring Heartland’s $60M breach settlement offer not enough, lawyers say FMC Technologies wins Petrobras contract KUHF Launches Business Radio Program Growing company has high hopes for medical device Ezra wins two landmark contracts worth $80million Prosperity to buy North Houston Bank Texas population gain expected from Katrina Houston businesses holding summit on Africa trade Chevron to scale back its refining business, trim jobs Exxon Mobil considering building campus north of Houston
  4. 4. JANUARY MARKET STUDIES As most of us are now aware, Houston was not immune to Comparing Costar’s Mid-Year Office Market Report to Our the ill effects of the stock market crash, credit crisis, and oil office specialist team was given data for comparative analysis volatility that have occurred over the past few years. Due to from 2Q 2009 to Year-End 2009 via Costar Group, a leading these three issues, Houston businesses have been forced to provider of commercial real estate information, marketing, audit their balance sheets to determine where cuts were and analytics. necessary. Because the cost of employees and rent are usually the first and second largest expenses, it is understandable that A comparison study was performed for office building rents in the employment and commercial real estate market, the Houston metro over the final six months of 2009. The especially the office market, would be greatly impacted. chart (see below) shows % differences in asking rents over the period – for each submarket and building type. To assist Houston businesses understand the impact that these events had on the commercial real estate market, my tenant Given this information, my office specialist brokerage team representation team performed a study based on Costar data concluded the following: as of 1/15/2010. The data is for the Greater Houston market area includes in the following counties: Bellaire: The greatest percentage decrease of asking rents in the last 6 months occurred in the Bellaire submarket – Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, specifically, class B office space. We think at around $17 p/sf Montgomery, and Waller (asking price) in an area that hosts a stronger tenant base is of exceptional value and rates should not drop much lower. In Source: Costar Group Bellaire, it is time to act on B office. Office Leases signed during the past 12 months: 692 Downtown: Class A rents have actually risen in Downtown in *data includes signings beginning on 1/15/2009 to 1/14/2010, the last 6 months. We believe Class A asking prices are includes renewals, not extensions ‘cooked’ in light of Marathon, Chevron, Shell, Exxon, and Conoco’s end of year announcements. We expect significant Office Leases signed during the previous 12 months (2008- decreases in Downtown asking rates – accelerating into year- end 2010. 2009): 853 *data includes signings beginning on 1/15/2008 to 1/14/2009, E Fort Bend/Sugar Land- While Class C rents remain above includes renewals, not extensions Class B rents in the area (???), we expect a continuing decline Total % Decrease in Office Leases Signed: 18.8% even as the submarket posted over a 10% decrease in the second-half of 2009. Healthcare will continue to be the driver for the area. FM 1960: Class C rents lower and vacancies higher, future road construction will slow business, and rents will continue their slide. The submarket is significantly overvalued due to a tremendous amount of available space for rent (retail & office). Greenway Plaza: Class A rents at close to $30 p/sf are overpriced and will see retrenchment, given that JP Morgan gave the keys back for its Crescent purchase, the A rents will We also found that the median square footage of office be of much better value to tenants – in 2011. We do think space leased was considerably lower over the past 12 months, the Crescent buildings asking rents are undervalued, though. when compared to the same period in 2008-2009. Katy Freeway: With the pickup in oil and gas activity in the Median Square Feet of Office Space Leased in the past 12 latter part of the year, it is no surprise that this market saw months: 2,058 SF green. For the year, the Class A Katy Freeway market had the greatest amount of net absorption of all submarkets in the Houston MSA. But, due to the abundant supply and some Median Square Feet of Office Space Leased in the prior 12 say weaker tenant base, the B buildings saw declines in the months (2008-2009): 2,708 SF rental rates. C buildings were of good value, thus a rise in rates. Total % Decrease in Square Feet of Office Space Leased: Continued at http://leasinghouston.org 24%
  5. 5. Tenant Representatives… Analyze your space needs. Investigate all properties and determine which are the most appropriate for your needs. Create a bidding war amongst several landlords for your business. Protect you during lease negotiations. Identify lease provisions that may cost or save you money during your lease term. Handle paperwork. Settle disputes that arise even after the lease is signed. Ensure you get the most value from tenant improvement allowances. Win concessions that anticipate your current and future needs. *Obtain payment from the landlord for procuring you, the tenant, for their building. Robert S. “Bob” Lowery & Rick Cagnolatti Tenant Representation Coldwell Banker Commercial 2121 Sage Road, Suite 150 Houston TX 77056 832-275-6514 or 832-659-5355 Office: 713-840-5000 http://cbcworldwide.com http://leasinghouston.org