But Roundtable Survey shows concern for refinancing challenges and impending wave of defaults.

Senior real estate executives say they’re feeling optimistic that commercial real estate is beginning to stabilize.

The big question is will the other shoe drop with a stomp?

The Real Estate Roundtable’s Q2 Sentiment Survey indicates that the market nationwide may have finally hit bottom and that valuations may be on a slow crawl back up.

That’s evident in the Tucson commercial real estate market, where we’ve seen the free fall of property valuations slow. Signs of recovery may occur this year.

But disturbing trends continue. The survey says that commercial property refinancing remains difficult and defaults continue to rise.

Many building owners carry vastly reduced equity, while lenders are demanding larger down payments to refinance maturing loans. The squeeze will lead to a significant number of commercial mortgage defaults. About half of commercial real estate loans in the United States could be under water by the end of 2010.

This calls for the tenant to protect against a default or foreclosure in a new lease or lease renewal.

You don’t want to get caught in a situation where a default or foreclosure will hamper your ability to make building improvements. You could lose crucial utilities and other building infrastructure in this position.

On the other hand, a financially strapped landlord may work with you in many surprising aspects in order to have you or keep you as a tenant.

It’s a balancing act that requires you to be knowledgeable of the Tucson commercial real estate market and where it’s going.

Tenant Representation Flo Chart by Michael Coretz

Don’t let a soft Tucson commercial real estate market fool you. You can save if you start looking at new or renewed leases early.

With all the vacant commercial real estate space in Tucson right now, you might think you can snap up a good spot for your business in no time.

Don’t delay in starting the process to get a new space or renewed lease! You can lose money if you wait too long. Or you can miss out on a sweet lease renewal for your industrial, retail or office commercial real estate.

It takes time in any economic environment to find space, negotiate a deal, do construction, install computer systems and move.

It takes as many as 6 months to go through the process if you need fewer than 10,000 square feet. More than 10,000 square feet and two years isn’t an unreasonable amount of time. More than 100,000 square feet and you might need more than two years.

Advantages to Starting a Search Early

Here’s why you should start early, even in this environment of high vacancies and foreclosures:

You limit your choices when you take time into consideration. If you’ve got to move in three months and that perfect space isn’t ready by then, you either have to eliminate that possibility or face an expensive extension on your current lease.

Your lease contract’s hold-over provision allows your landlord to charge you steep penalties—as much as triple your normal rent—if you don’t move out in time. The landlord can even start eviction proceedings.

If your landlord knows you’re looking at other spaces and that you’ll move out on time, you might get an attractive offer to stay. Landlords hate to lose their clients.

Even if you don’t want to move, you should investigate other sites. You may be surprised by what you find. And your current landlord, who doesn’t know how serious you are about moving, may give you incentives to stay put.

Immediate Rate Reduction

If, after exploring your options, you find you’d like to extend your current lease, you may be able to negotiate an immediate rent reduction.

Here’s how it works.

Say you have two years left on your lease at $24 a square foot. You tell your landlord that you want to renew your lease early and add 10 years to your lease.

In return for now giving the landlord a tenant for 12 years instead of two, ask to pay the current market rate, which, for example, may be $17 a square foot. Say you want to re-amortize your current $24 over the next 10 years.

That gets your rent down to $19.40 a square foot.

But remember, you can’t be in this position to deal unless you know what’s out there and can make a decision that’s most advantageous to you and your business.

Tenant Representation Flo Chart by Michael Coretz

Tucson’s Soft Commercial Real Estate Market offers Tenants several options to save on occupancy costs.

Still reeling from the tech downturn and subsequent economic recession, Tucson’s corporate real estate market continues to experience declining rental rates and increasing vacancy. Like markets all across the country, Tucson is experiencing high vacancy rates of more than 10 percent in retail, office, and industrial spaces. Building owners are pressured to strike deals because of competition for tenants and their own mortgage refinancing issues. Clearly, these market conditions have opened up numerous options for credit worthy corporate space users to negotiate rates and terms that deliver significant saving off overall occupancy costs.

For those corporate tenants in the market for new space, opportunities abound to capitalize on lower rates and increased concessions such as free rent, increased tenant-improvement allowances, reduced security deposits, and in some cases even cancellation or contraction/expansion options. With sublease space still flooding the market, not only is the excess space putting competitive pressure on direct –space landlords but also providing space seeking tenants with additional options . Eager, sometimes desperate, to reduce their surplus space liabilities, many sublessors are offering dramatically lower than market rates and numerous concessions.

But what if you are not is such an opportunistic position? What if you currently have more space than you need? Or what if your lease doesn’t expire for another eighteen months or more, and you are presently paying greater than market value? As a result of severely declining rental rates, it is not unheard of for companies to be locked into existing leases with terms several dollars above market rates.

Well believe it or not – you still have options. Even when your lease is years away from expiration, early renewal and lease restructure can be a viable cost-savings vehicles. Most proactive landlords have paid attention to the market trends and decided that it is much more cost effective for them to retain tenants – even at a reduced rate and/or reduced square footage – than run the risk of carrying liability of vacant space. As a result, proactive landlords are coming back to the bargaining table to entertain renewals and restructures on leases as far out as two to three years. This equates to a win-win for both landlords eager to extend current occupancy and tenants who have the opportunity to realize substantial immediate and long-term savings.

There’s no doubt that reducing overall occupancy costs is a major benefit for any corporate tenant; however for public companies, the benefit is magnified as the positive impact on the income statement also impacts earnings per share. If your company is considering a merger or trying to raise equity, reducing occupancy costs and delivering bottom line savings would definitely prove beneficial in reaching your economic targets. For instance if a company’s value is based on seven times earnings and it is able to reduce its occupancy costs by $100,000 per year, the savings could translate into an additional $700,000 of value.

Of course it is not wise to take advantage of the opportunities until you are armed with a strategic real estate plan that corresponds directly with your business plan. Although market dynamics have created an “upper-hand” environment for credit worthy space users , being able to accurately plan ahead for the next three to five years is crucial. Without a clear idea of future space needs, committing to a new and/or longer lease –despite cost or size reduction – is extremely risky. Where is the benefit of locking into a lower-cost five-year lease only to discover that you didn’t need half of the space two years from now? Conversely, what if you negotiated a space reduction in an extended five year term and realize you actually needed that space two years later? In both cases , chances are that the cost if adjusting your real estate to match your future, unanticipated space needs would negate any cost savings realized now. Remember, even in the most opportunistic circumstances, uncertainty can prove costly. Employing the services of a tenant-representation expert to ensure effective strategic planning is essential to making sound real estate decisions.

With more than 22 years of experience in commercial real estate, Michael Coretz is a principal in ITRA/ Commercial Real Estate Group of Tucson, LLC a leading regional, national and international corporate real estate advisory firm exclusively serving the needs of corporate space users. For more information call 520-299-3400 or visit www.cretucson.com.

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