The Real Deal Miami

Layoffs hit office market

By Alexander Britell | April 28, 2009 02:41PM

The faltering job market is having a direct effect on sales and leases of commercial real estate, as companies reduce space because of fewer workers, and demand stalls for what remain empty office buildings.

Companies struggling to stay afloat try to reduce the size of their workforces, which cuts some expenses, but also makes the spaces they occupy too big to maintain. That means rents can become disproportionately high, and even unsustainable. The flip side is that when companies can’t find more cost-effective spaces because their rents are too high — they have to lay off workers to survive.

According to Costar and Federal Reserve Economic Data, since unemployment hit its most recent low of 3.4 percent in January of 2007, it has increased to 8.5 percent. In the same time period, office vacancies in South Florida have increased from approximately 8 percent to just near 13 percent.

“You see a lot of professionals downsizing their spaces, they’re reducing costs,” said Bill Planes of Re/Max Advance Realty. “And a lot of my landlords have told me that they need rate reductions to help out and they’ve been given them, so it’s a tough time for everybody.

“I think it’s the job layoffs — people are getting laid off because they can’t get the offices that they need,” said Planes. “It all starts with the reduced credit lines that businesses usually run off of, they stopped the credit lines and there’s no more cash flow. They start laying off, and having to downsize their space. It’s all intertwined together.”

The link between layoffs and slumps in office real estate is largely intuitive, said Andrea Heuson, a finance professor at the University of Miami School of Business who deals extensively with real estate.

“Unemployment lowers the value of office properties — it is kind of obvious,” she said. “If a business closes, then it doesn’t really need office space. Most office leases are long term, so you don’t go back to the owner of the building and say, ‘I need lower rent.’ You would just default on a lease. But the relationship between the lender and the owner is separate than the relationship between the owner of the building and the tenants. The owner of the building is obligated to look to loan payments, while banks look to creditworthiness.”

Ms. Heuson said she has heard of another aspect to the market gaining momentum in tough times: distressed office realty.

“There is a lot of money waiting on the sidelines to try to snap up attractive real estate deals, when the current tenant is in difficulty, or the current owner. For example, when there is a bank that closes, and the owner of a building has the bank as a locked-in tenant, then the owner of the building has lost their tenant — so the owner of that building may need to sell that building at a distressed value. That gives somebody who’s got cash enough to finance a big chunk of the purchase, and loan to value ratios are lower, to snap up some good deals.”

Ms. Heuson says this could prove to be a boon for those who have the money available and are ready to pounce.

“It’s an advantage for the entities that have a lot of cash, and don’t have to rely heavily on financing. They have a good credit rating and can put up a lot of equity.”