Trading Spaces

Economic downturn yields better rental opportunities for charities, even as would-be buyers face sticker shock

The bursting of the technology boom has opened up possibilities for charities looking for cheaper office space. Even in regions such as the San Francisco Bay Area — only a few years ago awash in newly flush Internet companies and beset by skyrocketing rents — real-estate bargains are becoming easier to find.

The region’s depressed commercial market made it possible for the United Way of the Bay Area to find a cheaper and more desirable home, moving from its offices in San Francisco’s financial district to a smaller, more efficient space a quarter-mile north. The relocation reduced the United Way’s average rental rate to about $19 per square foot, down from $24, says George Chen, the organization’s chief financial officer. And its offices now have a view of scenic San Francisco Bay rather than a canyon of skyscrapers.

Mr. Chen says he feels particularly grateful that the charity’s lease expired in a declining market, as many companies lay off workers or fold, giving up office space. Had it sought housing during the Internet boom, it might have had to relocate to more affordable space outside the city. The new leasing deal comes at a good time, he adds, as the same slow economy that is driving down rents is also hurting the group’s revenue: Donations have fallen from about $59-million for the fiscal year ending June 2000 to a projected $42-million this year, Mr. Chen says. “We’re trying to tighten our belts,” he says.

Over the past two and half years, more charities that rent their offices have found themselves wielding unexpected clout as they negotiate their new leases — even as organizations hunting for property to buy face sticker shock.

“Now is a great time for tenants,” says Robert Bach, national director of market analysis for Grubb & Ellis, a national real-estate-services provider with headquarters in Northbrook, Ill., that also tracks real-estate statistics.

Obstacles to Ownership

From New York to Chicago to San Francisco, nearly all metropolitan office markets across the country have been hurt by the economy’s downturn, says Mr. Bach. The average American office market’s vacancy rate has steadily risen to 17.6 percent in the first quarter of this year since hitting a low of 8.5 percent in the second half of 2000, according to Mr. Bach. Meanwhile, he says, average rental rates per square foot have fallen about 19 percent to $28.50 for premium office space. Even in cities like Washington, where defense spending has helped support a low vacancy rate of 7.4 percent, Mr. Bach says, leasing activity is reportedly sluggish.

Which doesn’t mean that it’s a good time for charities to buy, say real-estate professionals. The soft leasing market typically hasn’t translated into good deals for organizations that want to purchase office space.

Although Mr. Bach says that organizations looking for small buildings with less than 5,000 square feet of space may find good buys, in general observers say pension funds and others looking for investment opportunities outside the soured stock market have been snapping up properties and pushing up purchase prices. And lower interest rates offer a paradox for buyers, according to Grubb & Ellis’s analysis of office-market trends. While low interest rates make loans relatively cheap for buyers, building owners feel less pressure to sell because they can refinance at rates low enough to offset declines in rental income, the report says.

“It’s very much a seller’s market,” says Mr. Bach.

Renegotiating Leases

By contrast, the outlook for commercial renters is rosier, say real-estate professionals. Many nonprofit and corporate tenants are upgrading their space while others are paying similar rents as in the recent past but negotiating concessions, such as construction allowances or several rent-free months, Mr. Bach says. In such a market, it no longer makes sense for tenants to wait until the end of their lease to check out their options, says William Himmelstein, a tenant representative at Cushman & Wakefield of Illinois, a branch of the international real-estate company that has its headquarters in New York. Instead, he suggests that groups examine the terms of their existing leases and use them as negotiating tools.

“Nonprofits don’t realize leases can be used as an asset,” says Mr. Himmelstein, who has worked with nonprofit clients. Even if an organization’s rental agreement doesn’t expire for the next few years, there are still ways that nonprofit tenants can adjust them. For example, he says, sometimes a new landlord will agree to pay a cancellation fee on an old lease.

Even though opportunities await nonprofit tenants seeking to relocate or renegotiate their lease terms, renters shouldn’t feel rushed to move ahead without carefully analyzing their situations, says Clara Miller, president of the Nonprofit Finance Fund, in New York, which provides loans to help nonprofit groups buy property or improve leased space. It is important for nonprofit organizations not to get swept up into the drama of a real-estate search without first analyzing their financial status and program needs, she says. She warns against renting more space than current programs require. “Even in times like these, when prices are low,” she says, “you always need to look a gift horse in the mouth.”

For example, the Nonprofit Finance Fund has developed a checklist to help charities analyze their space needs. Among the pointers: a quick tour of the current facility, an accounting of the number of people using it, and a summary of the space’s functional problems. Ms. Miller recommends working with a broker who is familiar with nonprofit groups.

The sheer array of real-estate choices open to nonprofit tenants these days can be overwhelming. The choices are so broad that it’s a challenge to remain focused, says Reese W. Fayde, chief executive officer of Living Cities, a nonprofit group in New York City that supports urban community development. “Real estate is one of those wonderfully seductive adventures,” she says, “and you can lose a little perspective as to why you are renting the space.”

For example, Ms. Fayde’s group planned to expand by moving from its current 1,500-square-foot offices in the city’s residential Upper West Side neighborhood into Harlem, the kind of revitalized urban business district in which the group makes investments. But as she looked for property, she sometimes grew sympathetic with landlords who needed a tenant rather than focusing on buildings that would best suit Living Cities’ needs. Her commitment to the ultimate goal eventually won: She says she is pleased that Living Cities will be moving in September into a 4,000-square-foot space in a Harlem building that also houses the offices of former president Bill Clinton.

Reassuring Landlords

Even in a buyers’ market, it is also important to remember that landlords can be fickle about nonprofit tenants.

“Landlords read the paper like everybody else, and they’re seeing the possibility that a nonprofit may have less earnings in the future,” says Dirck Brinkerhoff, chief executive officer of H&L Commercial Real Estate in San Rafael, Calif., which works with nonprofit clients. Unless a charity can demonstrate a stable income stream, Mr. Brinkerhoff says, it may be forced to rent space as is without any improvements.

Suzanne Sunshine, who has specialized in representing nonprofit renters at Time Equities and in her current job at Cushman & Wakefield, both in New York (and helped Living Cities find its new offices), says deals can fall apart quickly if landlords perceive that tenants will use their properties to serve clients that could pose a threat to the image or prestige of their buildings.

To smooth the way, Ms. Sunshine says, she aims to present her nonprofit clients to landlords in an honest but positive light. She makes sure she translates potentially off-putting descriptions of an organization’s mission into reassuring language — explaining, for example, that a group treats people with depression rather than simply using the broader term of “mental illness.”

She also makes a habit of bringing landlords through the nonprofit group’s old space to break down any faulty perceptions about what the group does and what kind of traffic it might have. “It usually ends up making the deal happen,” says Ms. Sunshine, who has served as vice president of the Dana Foundation, in New York, and as an executive at the nonprofit Local Initiative Support Corporation, a national community-development organization.

Of course, even in molasses-slow markets, a nonprofit group sometimes needs to put pressure on landlords to get sweeter deals.

The Community Investment Corporation, a nonprofit mortgage lender for Chicago’s low-income neighborhoods, still had about two years left on its 10-year office lease when it decided to test the real-estate market because of the group’s need for more space. Although the Community Investment Corporation liked its location in an office tower built on top of Union Station, the city’s major ground-transportation hub, the initial price its landlord proposed to renew its lease would have doubled its annual rent, says Michael Bielawa, the group’s vice president.

Broker’s Help

But after the Community Investment Group came close to signing a lease to relocate, the current landlord improved the lease offer, says Mr. Bielawa. As a result, the group got about 1,700 additional square feet, and several months of occupancy rent-free, he says: “We wound up with exactly what we wanted.”

Mr. Bielawa advises other charities that seek rental space to enlist the aid of a professional broker to help them navigate the market. Searching for properties, lining up appointments to see spaces, and analyzing alternatives takes too much time for any busy organization to go it alone, he says.

Even with a broker’s help, he says, it is essential to prepare for a long search. “Start early,” he says, noting that his group’s quest for property and its move into its expanded space took about 18 months. “It’s a long process.”