Commercial Real Estate Leases in a One-Click World

Commercial real estate today is nothing short of fascinating. In fact, I find that the lines between the life of a commercial and residential agent are becoming somewhat blurred. I was always told that commercial real estate is a non-emotional, numbers game, where the agent was valued for their expertise, but that has all seemed to change with the onset of the pandemic.

What Changed?

The shutting down of the economy spurred governments and central banks into action in the spring of 2020. Exorbitant amounts of cash were pumped into the global economy and interest rates were dropped back down to zero after attempts to raise them in the years leading up to the pandemic. Their effects are both psychological and economic in nature.

The economic effect is rather straightforward. Cheap money – lots of it – has made its way into the pockets of so many people across the country. Some of this was provided by the government in the form of loans or social benefits, while financial institutions have also made their efforts to lend out as much as they can. For the latter, it’s a case of earning as much yield as possible in a world of seemingly endless rock-bottom rates.?

The shutdown of the economy resulted in mass layoffs and furloughs, leaving so many once securely employed people to contemplate their respective futures. Fearing the possibility of further shutdowns and layoffs, many individuals that benefited from the foregoing financial boost made the decision to start their own businesses. This is a great thing for our economy, given the contribution of small and mid-sized enterprises to our state and national GDP, however, this influx of new entrepreneurs doesn’t come without its own setbacks.

The Internet-Based Consumer Economy

We are all guilty of it: instant gratification with the click of a button. Over the past decade and a half, we have all satisfied many of our day-to-day needs with the convenience and speed of the internet. We have the capability of getting information about practically anything, buying groceries, and even purchasing big ticket items, such as vehicles and homes, with the simple click of a button. The shutdowns of 2020 and early-2021 served as a catalyst to intensify that shift in a short span of time.?

While the foregoing is a testament to the technological advancements of our society and infrastructure, it has also given us a warped sense of reality across all aspects of life. It has given us the impression that everything and anything is available at our fingertips whenever we please. In the real estate industry, the likes of Homie and their peers have facilitated the ability for consumers to purchase and sell homes through the power of the internet. The messaging has essentially been, “who needs a real estate agent when you have the internet?” And why not, right? You can file your own taxes, trade securities, purchase insurance and prepare legal documents without the need to hire a knowledgeable practitioner. YOU are the expert.

Missing the Whole Picture

Online real estate platforms have been convenient and straightforward for some, but have turned into nightmares for others. The reality that these sites have not exposed consumers to is the fact that residential and commercial real estate is a complex ecosystem that follows rules and procedures involving multiple stakeholders. Homeowners attempting to sell their properties online have frequently gotten themselves into such legal and procedural complexities that they have cost them time, money and sanity. Many of these homeowners have subsequently called real estate professionals to help get them out of their quagmire, only to find out that they are unable to cancel their contracts or that they need to hire an attorney. The world of purchasing and selling residential real estate online is a slippery one. So what does this have to do with commercial real estate?

Reality Bites

The perceived notion of transacting real estate online and having everything at your fingertips can be frustrating for many new business owners when reality sets in. Maybe they’ve had past success with residential platforms, or perhaps they have benefitted from the online tools that residential agents have at their disposal, such as multiple listing service (MLS) flashes, which send emails of newly-listed properties to them in real time. The reality of commercial real estate is a far cry from that.

For starters, there is no MLS in the world of commercial real estate. There are very useful websites with listings that prospective tenants can peruse, such as LoopNet and RealNex, but one combined, white label portal that provides updates of new listings does not exist. In fact, in a scarce market, such as what commercial real estate is experiencing today, an agent’s well-established industry contacts are far more valuable than listing platforms. And I can tell you first hand that this type of intel is not available with the click of a button.

“We just want to see what’s available.”

Have you ever noticed that residential real estate agents have become more demanding of client information as of late? This is because the last thing that an agent wants is to become a tour guide for unqualified buyers. MLS flashes and Realtor.com are great for people looking to see what’s available in the market. But in any real estate agent’s world, time is money, and in a scarce property environment, that concept is amplified.

For a commercial agent, who finds and comps properties and negotiates and reviews lengthy and complex agreements, that pressure can be even greater. After all, there are more residential property buyers and renters than there are commercial tenants in the real estate world. Most commercial agents take rigid steps to qualify potential clients. This includes asking somewhat invasive questions, such the amount if finances a business has, whether or not the business has ever been late on rent payments, if if has ever face eviction, etc. Why do they ask such questions? Because leasing a commercial space is, in many cases, on par with the financial and legal responsibilities of purchasing a home.

Answering those difficult questions is the first step in an agent's ability to determine if a business can even enter into a long-term commercial lease agreement. Listing agents do not want to spend hours or days reviewing a letter of intent (LOI) and an applicant's financials only to find out that the applicant simply wants to see what properties are available in the market without any intent of signing a lease. And any professional tenant representative will extend that care and courtesy to their listing counterparts.

“The landlord should be grateful that we’re applying.”

Many business owners walk into their commercial property search with the attitude that landlords should be grateful that they are even interested in their space. I experience this with a lot of clients and have to very gently explain to them that while commercial properties are income-generating assets that depend on tenants, they are also depreciating investments with favorable tax benefits. In other words, they’re great write-offs for investors that need to offset gains from other assets. That means that it is a choice for a landlord to allow a tenant to rent their space as much as it is the business’ choice to lease it.

In a recent conversation with an industry colleague, they explained that they represented a client that applied for a retail space where the landlord rejected the previous dozen and a half applicants. In fact, some of those applicants were franchisees of nationally recognized brands. Yes, some landlords may not want YOUR business. At the end of the day, if the risk is greater than the benefits, the property can serve as a great tax write-off until a lower-risk tenant comes along.

“This is too much work.”

Many new business owners can get put off with the amount of work and business information required in a commercial real estate lease, including bank statements, tax returns, personal guarantees, etc. “For goodness sake, I’m not buying the bloody place,” they will often exclaim. No, you are not, but you are getting into a long-term (often 3-5 years) commitment that can amount to upwards of tens of thousands of dollars. It is simply not the same as purchasing a $500 flat screen online - there is no one-click transaction. And, sorry for you blockchain enthusiasts, but technology will not fully resolve this. At least not in the short term, and certainly not for commercial real estate contracts, which are all unique with their own complexities.

Changing Expectations

Does this mean that you should not pursue opening a small business and leasing a commercial space? Not at all. It simply means that the online, one-click phenomenon that has been pervasive in many industry sectors simply does not apply here. If your expectations are about wanting a space that fits your every need with little to no effort, then I suggest you contemplate my comments or simply abandon your search altogether. Real estate, as a whole, is complex. And commercial real estate adds an element of idiosyncrasy to that complexity. So don’t despair when you approach an agent that asks too many questions. Much like starting a new business, finding and negotiating the terms of a new commercial real estate space requires work and commitment from all parties. As any seasoned agent will tell you, there is no one-click solution.