On April 2, 2010 the Wall Street Journal ran an article by Peter Latman and Anton Troianovski reporting on the vacancies in the office building known as 9 West. The fact that there are vacancies in one of the premier New York office buildings is not surprising because many prime building across America have vacancies. But, the interesting information in the report is found in the statement “Brokers and tenants trace the vacancies to Sheldon Solow, 9 West’s billionaire owner. Mr. Solow has declined to reduce rents in the building, where the highest floors go for roughly $200 a square foot. The average asking rent of 9 West’s neighborhood, the Plaza district: $79 per square foot down 18% from a year ago…†The article also contains a quote from a large brokerage firm saying “I think that there’s been a perception in the marketplace that doing business with the Solow’s is difficultâ€.
These observations raise the question as to how much of the current office vacancy around the nation is just the result of an adverse market and how much is self inflicted by unrealistic ownership or management. Any real estate broker can tell you that there are property owners and managers that are just difficult, if not impossible, to deal with. Any tenant can tell you that there are owners and managers that just will not recognize the fact of competitive market rents harboring their own views as to what rents should be. Both of these situations can lead to self inflicted vacancy.
Too often, property owners (managers) look at tenants as an “evil necessity†to their business instead of recognizing that tenants are their good customers. Successful, sophisticated owners and managers deal with tenant prospects and existing tenants as very important customers and bend over backwards to do all reasonable to keep their customer happy. This doesn’t mean that successful owners do not experience vacancies but, through well articulated tenant retention programs there vacancy exposure is reduced. Successful owners and managers, recognizing rising vacancies also recognize that when there is substantial vacant space on the market, their tenants are targets for the competing buildings that will do all in their power to lure their tenants away. So, instead of waiting they will be pro-active in approaching their tenants with expirations looming in the future and immediately renegotiating their leases as a strategy to make them unattractive targets of a competitor. Yet, there are owners like Solow who, instead of letting the market dictate decisions, believe that they can get away with whatever they want. Being difficult to deal with only causes leasing brokers and tenants to avoid them except when there are no other alternatives. That is not smart or sophisticated.
There are too many examples of difficult owners or managers and there a variety of reasons for being difficult. In the case of corporate or institutional ownership, failure to be progressive in dealing with tenants often stems from the desire of the decision maker to avoid leaving their “fingerprints†on any decision that, in light of history, may prove to have been a good deal for the tenant. This most often happens at times of rent resetting under leases calling for adjustment of rent after a certain period of time and providing that adjusted rent would be decided by agreement and if no agreement is reached than decided by arbitration. Too often the decision maker seeks a rent that is too high and, rather than going with the market information, decides to arbitrate so that any decision at a lower amount will not bear their fingerprintâ€. Too often this process leads to substantial friction between landlord and tenant resulting in the tenant making decision to move out at the end of their lease no matter what. But, there are too many landlords like the Solow’s who just refuse to negotiate based on what the market dictates and, rather view the negotiation as a test of “powerâ€. By being “difficult†one exhibits “power†or so they may think. If one wants to use power, it should be in the context of reality. When vacancy rates are at 10% and above, as is the case in so many markets power ploys do not usually succeed so they should be used cautiously.
Property owners and managers should be, at all times, completely in tune with what is going on in the market. To obtain and retain tenants they should recognize the dictates of the market and, most importantly, in difficult times they should avoid using the weak market as an excuse for deferring needed maintenance and postponing necessary upgrades since that strategy will lead to reduced occupancy on its own..
