According to Guggenheim, nearly $1.2 trillion of commercial mortgage loans will mature in 2024-2025, with office loans accounting for 17 percent of those maturities. 75% of these loans are held by local and regional banks, with only 10% of CMBS loans paid off at maturity on original terms from July – September of 2023.

With $15.2 billion of commercial mortgage-backed securities in the office sector expected to mature this year, Moody’s Analytics states that 80% have performance characteristics that would make them difficult to refinance, requiring fresh equity to balance the debt yield on many of their loans to retain building ownership and not turn it over to the lender.  

This equity infusion will be critical to lenders, many of whom are facing increased scrutiny from regulators. Last year, regulators unveiled the “Basel III” proposal to overhaul how banks with more than $100 billion in assets calculate the cash they must set aside to absorb potential losses. This means they must reserve more capital for their balance sheets from all their assets, including their commercial real estate holdings.  

This comes at a time when many companies are rethinking their office footprint and incorporating hybrid work schedules modeled off the work-from-home culture fostered during the pandemic. This new way of working continues to diminish physical office space’s role in Corporate America’s overall business strategy—complicating a lender’s ability to collect debt while threatening the financial viability of many owners and landlords.  

CRE debt provides tenants with a competitive advantage.  

A landlord’s debt burden can have direct and indirect effects on tenants, ranging from basic maintenance and amenity concerns to a landlord’s ability to fund tenant improvement allowances and execute on lease negotiations. 

Should a building go into default and a bank, the change in landlord can impact the continuity of a tenant’s lease agreement and building services. Landlords with a reputation for sound business practices will try to work with their lenders to address their debt obligation early. In contrast, some others may delay this process to push any cash obligations owed into the future.  

As such, tenants should have an idea of when their landlord’s loan matures, as that can serve as an inflection point in future lease negotiations. The closer a landlord is to that maturity date, the fewer financial options they will have, especially in this environment. One of the most impactful ways to ensure a landlord’s ability to maintain an asset and do so with the least out-of-pocket cost is to secure long-term leases with the building’s most prominent tenants. So, 18 to 24 months before loan maturation, tenants should start engaging in renegotiation discussions with their landlord, whether it coincides with their lease expiration or not, as it will directly impact the loan proceeds achievable in a refinance and could be used to negotiate a favorable extension with generous tenant allowance improvements. 

Facilitating winning arrangements.  

During negotiations, tenants should push landlords to provide transparent disclosure regarding their financial status, including debt obligations, to ensure tenants are fully informed about the potential ownership risks. Tenants should conduct due diligence and seek clarity on the terms of their lease agreements, including any clauses related to the landlord’s debt and its impact on the property. Similarly, lenders who want to recoup their capital will want to ensure their real estate assets have value and are secure with stable tenancy. 

Initiating these discussions with landlords and advocating for transparency empowers tenants to safeguard their interests and mitigate risks associated with landlord debt exposure. Similarly, landlords and lenders benefit from open communication with tenants, fostering a mutually beneficial relationship that bolsters property value and stability. 

The complexities of landlord debt and its implications on financial flexibility and decision-making underscore the need for tenants to seek guidance from knowledgeable advisors who possess a deep understanding of: 

• Ownership structures & portfolio dynamics
• Regional and national capital market trends
• Developments in the debt markets
• The financial health and strength of individual landlords. 

Such expertise enables tenants to achieve their goals irrespective of market conditions and often times agnostic of lease expirations. By fostering an environment of transparency and leveraging expertise, tenants can effectively mitigate risks and achieve their objectives, ensuring long-term success in the evolving landscape of commercial real estate.

Shay Pope, MCR serves as a Managing Director and Executive Vice President for Stream Florida, helping a diverse range of industries develop and implement strategic plans that align real estate and human capital strategies with long-term financial goals.

Jason Warren is the Head of Strategy and Analytics for Stream Florida, using finance, analytics, and forensic due diligence to provide clients and brokers with strategies that serve as a foundation for broader real estate decision-making.

John Rogers is an Executive Managing Director & Partner for Stream’s Investment Management team, managing Stream’s discretionary equity funds across investments and assets, along with all debt capital market activities for Stream’s markets nationally. 

The post How Landlord Financing Can Benefit Tenants in Today’s CRE Market appeared first on Stream Realty Partners.

The picturesque landscapes of Colorado have long been synonymous with breathtaking mountains and outdoor adventures. However, beneath the stunning natural beauty lies a burgeoning industrial transformation that is reshaping the state’s economic landscape.  

In recent years, Denver’s presence as a focal point for the aerospace and advanced manufacturing industries has grown exponentially, with companies seeking strategic spaces that foster sustained growth. Supply chain issues realized during the peak of COVID resulting in the progression of onshoring manufacturing companies, supplementing the billions of dollars in government grants to manufacturing, defense, and aerospace industries, have been significant catalysts in these sectors’ resurgence in Colorado. But this industrial renaissance isn’t confined to the traditional hubs of Boulder and Denver; instead, it’s permeating adjacent submarkets, marking a paradigm shift in the region’s industrial narrative. 

As renowned entities like Lockheed Martin, Ball Aerospace, and Sierra Space extend their reach and attract other aerospace manufacturers and suppliers, the prominence of these tenant profiles has shifted the market. For example, Denver’s East I-70 submarket, which has historically commanded a high volume of transactions from big-box distributors, has softened, particularly for bulk warehouses in speculative projects. Meanwhile, shallow bay rear-load buildings with heavy power in the Northwest and North I-25 submarkets, which have historically recorded lower transaction volume, are undergoing a notable resurgence and have commanded significant interest from users, particularly in the aerospace and manufacturing sectors. 

Rental Rates 

Against the backdrop of this industrial pivot, the intricate tapestry of rental dynamics is revealing intriguing shifts across various submarkets.  

The East I-70 corridor, which has traditionally attracted occupiers in need of expansive facilities, is experiencing a shift in preferences. There is a noticeable decrease in the demand for larger-sized spaces, indicating that large distributors and suppliers are taking a strategic pause to evaluate their options amidst the evolving economic conditions. The Southeast submarket highlights another concern: supply outpacing demand, causing rents to plateau. This introspective phase may be influenced by factors such as changing consumer behaviors, tenant profiles, market shifts, or a desire for more agile and adaptable spaces. 

Contrastingly, infill Northwest, North I-25, and Central submarkets present a dynamic scenario characterized by sustained rental rate increases, fueled mainly by increased development costs, scarcity of land, and occupier’s location preferences. The Northwest and Central submarkets face a scarcity of suitable spaces for growth due to limited land for expansion, creating a competitive landscape reflected in a sustained uptick in rental prices. In the North I-25 region, the development of new assets delivered with expensive speculative office space and increased power has created a dynamic that requires developers to raise rents to maintain their projected yields. These submarkets, therefore, stand as a testament to challenges posed by limited resources and the ever-present pressure of construction costs in the face of growing demand by a new wave of occupiers. 

In essence, the demand from aerospace and advanced manufacturing companies historically located along the I-36 corridor necessity for additional space, coupled with the scarcity of land to build additional product, has begun to push occupiers to the adjacent I-25 submarket and down into infill Central Submarket facilities. The relatively limited pocket of growth can, in part, be associated with the challenge of skilled labor retention and the desire to be near the large aerospace players in the market, therefore painting a picture of an industrial sector in flux, responding to various economic, logistical, and market forces

Meeting immediate and changing needs.  

Traditionally, the process of securing industrial space in Colorado involves intricate permitting procedures and lengthy construction timelines that present formidable obstacles for companies with immediate space needs. Recognizing the urgency dictated by the dynamic and fast-paced nature of this emerging subset of tenants in the market, developers are proactively implementing strategic measures to address the pressing space requirements of tenants. 

The approach to building speculative offices seamlessly integrated alongside industrial building deliveries serves a dual purpose, streamlining the leasing process while accommodating the compressed timelines of aerospace and manufacturing tenants seeking rapid occupancy due to the speed of growth. By incorporating speculative offices directly into industrial constructions, developers not only mitigate lead times but also foster a more agile and responsive leasing environment, ensuring an efficient experience for businesses in need of urgent solutions. 

Furthermore, developers are actively working to deliver industrial buildings equipped with enhanced power capabilities that exceed the capacities of traditional spaces, primarily required by aerospace and manufacturing groups. This strategic foresight acknowledges the reality that the timeline for such upgrades post-occupancy could extend upwards of 18 months. By providing buildings with augmented power infrastructure, developers are offering tenants the flexibility and scalability required to meet evolving operational demands, ensuring that the industrial spaces remain adaptable to the dynamic needs of businesses over an extended duration.  

Shaping a Dynamic Hub 

The industrial landscape in Colorado is not merely a passive observer of change; it is actively shaping its identity as a dynamic and thriving aerospace and manufacturing hub. This transformation is evident through strategic initiatives such as constructing speculative offices and delivering heightened power; both underscore the market’s adaptability and responsiveness to the ever-evolving dynamics of industry growth. 

As Colorado continues to shape its identity in the industrial realm, the significance of strategic planning and innovative solutions cannot be overstated. Developers’ creativity in solving shortages in water and power will influence their ability to succeed and cater to a resurging aerospace industry. In summary, Navigating the complexities of this evolving landscape requires a commitment to pushing boundaries, embracing change, and envisioning an industrial future beyond conventional expectations. The success of this evolution will hinge on the industry’s ability to not just respond but actively shape the trajectory of Colorado’s industrial narrative. 

The post Denver’s Industrial Evolution: A Growing Hub for Aerospace and Manufacturing appeared first on Stream Realty Partners.

It’s important to note that many companies are not opposed to flexible work arrangements, which were in place long before the pandemic began. However, they have found that the extreme shift towards remote-only employment has negatively impacted their corporate culture, making it difficult to attract and retain top talent.

The challenge for many employees in returning to the office is more about returning to an office or work environment filled with the status quo. According to McKinsey, employees long for workplaces filled with trust, social cohesion, and purpose–driven attributes that are difficult to cultivate in a virtual setting. As such, the office is still integral–not just for businesses but for employees, too.

As companies reintegrate in-office expectations for the work week, they are finding that the alignment of space, place, and being is the success factor. This alignment is being driven through innovative space utilization, integrated technologies, and customized amenities— strengthening employee purpose, generating renewed energy, and driving organizational performance.

Here is just one of their stories.

The office’s central role in supporting LERMA’s culture, operations, and long-term growth. 

LERMA/ is a premier ad agency in Dallas, TX, that has worked with notable brands such as Anheuser-Bush, Avocados from Mexico, The Dallas Cowboys, Keurig, Dr. Pepper, The Home Depot, and more. Known to push the envelope when it comes to creativity and innovation, LERMA/ found themselves searching for a headquarters that would support their growing business and long-term goals. We sat down with Chief Executive Officer and Founder Pedro Lerma to discuss why he felt The Luminary was the perfect office location, as well as the impact LERMA’s new office space has had on its operational model.

What was important when considering LERMA’s HQ design and location?

Rooted at the intersection of two of Dallas’ primary freeways, The Luminary was brilliantly marketed with a sign that read, “Best Signage Opportunity in Dallas,” which I immediately recognized as true; the exposure was ideal. It just never occurred to me that it could be for LERMA/ until I started working with Stream.

In selecting the space and determining the layout, it was important to determine how we could support our operational objectives while fueling our employees. As such, we decided to embrace the fact that hybrid work arrangements would be the new normal and remained mindful of that concept, along with our company ideals, as we strategized space plans with our architects.

How does your new office space enhance LERMA’s culture?

During the pandemic, LERMA/ was able to maintain productivity at a high level with our teams working remotely, but our culture suffered. As a creative firm, our culture is critical to who we are, so it is imperative that our company’s culture is continuously fostered and nurtured. This makes an in-office component to our operations vital to our success.

To cultivate collaboration and ingenuity, we designed spaces that were clearly defined to serve a collaborative purpose so teams could comfortably gather. But we were also intentional about crafting spaces intended for privacy (such as huddle rooms and phone booths). We wanted to make sure the office was optimal for both groups and individuals to thrive.

Is LERMA’s new office supporting growth objectives?

Knowing that we are continuing to grow both organically and through acquisitions, our office is serving a central role, supporting our teams and LERMA’s mission: channeling creativity for good. It’s about proper space utilization, rooted in what I like to call the three C’s: Culture, Collaboration, and Creativity.

While the office will remain vital to driving metrics and success, it must change to meet the needs of an evolving workforce.

As companies determine next steps for their organizations, it’s essential to keep the following in mind:

1. Physical office space is necessary. Whether your teams are in the office five days a week or three, the office must serve as a point of connection where shared mission and vision are defined and achieved. It is the only way to strengthen company culture and further develop employees – creating environments ripe for growth.

2. Proper space planning is fundamental. The office is much more than just a workspace. It’s a location that supports what is needed today and can evolve into what is needed tomorrow. Designs should take into consideration the way teams operate, supporting collaboration and mentorship, as well as the ability to work independently.

3. The role of the office has changed. Offices are no longer solely dedicated to an 8-5 grind but a safe space where employees can explore and achieve their personal goals and objectives alongside the greater organizational mission. As such, the office must provide enriching, ongoing experiences that empower and inspire.

Stream is one of the nation’s fastest-growing full-service commercial real estate firms, with a distinct, people-first culture. The leasing transaction and construction services for LERMA/ were led by Dan Harris, Managing Director of Tenant Representation Services, and Bobby Kunkle, Senior Director of Project Management Services. 

The post A Tale of Two Tenants: How Proper Space Utilization Optimizes Business Performance and Growth appeared first on Stream Realty Partners.

An increase in debt maturities isn’t necessarily problematic; however, the combination of rising interest rates and office value decline is. As of February 2023, U.S. commercial real estate debt rose to a 14-year high of 5.2%, with defaults at the highest they’ve been since 2009. Office properties accounted for 44% of all defaulted commercial mortgage-backed security debt transfers, followed by retail at 32% and multifamily at 19%.

While it’s been standard practice for a landlord to request an occupier’s credentials to ensure their ability to pay, conditions within the market have caused the tables to turn. Occupiers, in need of additional assurances as the economy continues to evolve, are now requesting full disclosure of a landlord’s financials before signing a lease, all to ensure the asset remains in prime condition and well-managed during their tenure.

Tenants must understand the creditworthiness of a landlord before signing any deal to ensure their own company, finances, and operations are not at risk.

As occupiers look to renew or move into a new space over the next several years, it is crucial to understand if the landlord can retain the asset and has access to the capital necessary to fund operations that fit their tenants’ needs.

If the landlord cannot retain the asset during tenancy, it’s likely that the building will have a different owner, whether that be a bank, special servicer, or a new landlord through a sale. It’s important to note that many banks and special servicers do not have the infrastructure to manage the portfolio of buildings that will return to them during this debt crisis, leaving a tenant with many unknowns should the landlord cease to own the property.

And, since numerous banks and private debt funds have tightened their lending policies or stopped lending altogether, many landlords are putting forth proposals that their lenders deny, meaning they cannot fulfill promises made. As such, stable assets, rather than just updated or new, are becoming top-of-mind for many occupiers as they look to ensure their operations aren’t negatively impacted by an asset’s default.

It comes down to due diligence. 

Determining whether a landlord can retain an asset as well as if a landlord has the capital needed to fund a new tenant transaction comes down to evaluating the landlord’s:

• Current cash position
• Debt and equity structure
• Ability to raise funds

Additionally, tenants should be aware of their potential landlord’s investment strategy to ensure they can commit to numerous deals simultaneously, whether they are looking to sell and reallocate funds to a different asset class or conduct a portfolio rollover.

By diving into a landlord’s capital stack to understand their investment strategy and sources of financing, occupiers can negotiate from a position of strength, regardless of market conditions, and confidently move into the perfect office location for the entirety of their tenancy.

How well do you know your owner?

As markets evolve, remaining informed and strategic is integral to driving value and growth. Stream’s extensive “Know Your Owner” assessment provides clients with a comprehensive understanding of a landlord’s financial position and/or the underwriting of landlords in potential relocation options so that they can move forward with certainty. With unsurpassed market knowledge and data-led creativity, Stream’s advisory services are crafted to ensure clients achieve their short- and long-term objectives, with a proven track record of success. Contact Stream’s South Florida team today to learn more.

Jason Warren is Head of Strategy and Analytics for Stream’s South Florida team, using finance, analytics, and forensic due diligence to provide clients and brokers with insights that serve as a foundation for more educated real estate decisions.

The post The Importance of ‘Knowing Your Owner’ In Today’s CRE Market appeared first on Stream Realty Partners.