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Despite Bleak Near-Term Outlook, Philadelphia Economy Should Survive Coronavirus

The coronavirus spread has reintroduced factors absent from in the national and Philadelphia commercial real estate markets economy for almost a decade: widespread fear and uncertainty.

As we are early in the onset, and short on government data points collected after the virus’ spread, any market analyst in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space –  worth his or her salt will admit there will be a deluge of question marks hanging over the economic outlook during the next month or two.

However, it’s still constructive to take stock of what we do know, in order to build up as clear a picture of the road ahead as possible for U.S. and Philadelphia commercial real estate listings.

This CoStar Realty Information Inc. report involving U.S. and Philadelphia commercial properties is being made available through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

First off, a painful near-term decline in Philly’s economic figures in relation to national and Philadelphia commercial real estate properties is all but certain for this spring. To curb the virus’ spread and prevent hospitals from being overwhelmed with patients, Pennsylvania and New Jersey governors both ordered all nonessential businesses to close on March 16.

How long are these monumental measures likely to stay in place? China’s aggressive lockdown measures lasted about two months. The CDC recently recommended cancelling or postponing any gatherings of 50 scheduled through mid-May. Johns Hopkins University School of Medicine’s infectious disease expert Morgan Katz expects meaningful improvements by early May.

Meanwhile, Treasury Secretary Steven Mnuchin is at the center of the White House’s economic response to this crisis and says Republican senators’ proposed Coronavirus Relief Bill, now under debate in the Congress, aims to cushion businesses for 10-12 weeks of serious disruption. That would take us through early- to mid-June.

Regardless of how long these shutdowns last, the leisure/hospitality sector and retail trade sectors in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – will likely be some of the worst-affected major industries. They represent 10 percent and 8 percent of Philadelphia total employment, respectively.

Hit by department store closures and the shift to automated or online checkout, Philadelphia’s retail employment already was on the decline before the onset of the virus. Considering how many national retailers’ balance sheets had already been eroding prior to the onset of this crisis, the road ahead looks like a painful one for the retail markets related to national and Philadelphia commercial real estate listings.

Leisure and hospitality employment, supported mostly by restaurants, bars, and hotels, had been one of the metropolitan area’s fastest-growing employment sectors. Center City’s blossoming nightlife has been a key ingredient to Philadelphia economic revival over the past 15 to 20 years. The fact that the industry is now at such high risk is probably the biggest existential threat posed by the coronavirus to Philadelphia’s ongoing revival.

But overall, the coronavirus and its accompanying economic shock do not pose major threats to the fundamental drivers of Philadelphia’s economic renaissance over the past 15 to 20 years.

Philadelphia’s industry mix positions it better than most major U.S. cities to weather the negative economic impact of the coronavirus. Very few major U.S. markets have higher concentrations of the sector including healthcare, professional and business services which will likely remain most resilient in the months ahead.

Meanwhile, Philadelphia has relatively lower concentrations of the sectors now most at risk such as leisure and hospitality, retail and oil and gas extraction.

The city’s status as a powerhouse of healthcare innovation only gains renewed importance as a result of the current tragedy and will be a key economic benefit as the number of U.S. residents aged 70 and older grows by 40 percent over the course of this new decade.

Meanwhile, the cost of living differential between Philadelphia and its nearby competitors, New York, Boston and Washington, D.C., remains massive. Philadelphia will continue to attract large net inflows of college-educated young adults moving from these places in search of more spacious housing and higher savings/disposable income.

In other words, for firms able to remain on offense during what will undoubtedly be challenging months ahead, Philadelphia remains an attractive destination for real estate investment capital seeking stable long-term growth, especially when stacked against other major metropolitan areas in the U.S. uncertainty. – By Adrian Ponsen, CoStar Analytics.

For more information about Philly office space, Philly retail space, and Philly industrial space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly office space, Philly retail space and Philly industrial space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly office space, Philly retail space or Philly industrial space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly office space, Philly retail space or Philly industrial space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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U.S. Economy Records Another Month of Job Growth

For the second month in a row, U.S. firms active in the national and Philadelphia commercial real estate markets blasted past hiring expectations, adding 273,000 net new jobs in February according to last week’s national employment report released by the Commerce Department.

The unexpectedly strong report, culled from a variety of corporations in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space –  was further bolstered by revisions to December and January payroll data that added an astounding 85,000 jobs in those months combined, bringing the three-month average job gain to 243,000 per month, a rate not seen since September 2016. Meanwhile, the unemployment rate ticked back down to its 50-year low of 3.5%.

This CoStar Realty Information Inc. report involving U.S. and Philadelphia commercial properties is being made available through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

The survey of employers related to U.S. and Philadelphia commercial real estate listings used to compile this data was administered in the second week of February before it became apparent that the coronavirus outbreak in China had spread throughout much of the globe, including the U.S. A potential preventative vaccine is at least a year or more away, according to health officials, and therapeutic treatment remains uncertain and probably won’t be available until late spring at the earliest.

To avoid widespread transmission, factories in China and other Asian nations had halted operations and workers were isolated or quarantined. Several nations have closed their borders to visitors from impacted areas, and many national and international companies involved with national and Philadelphia commercial real estate properties now are restricting business travel.

This has led to interrupted supply chains for manufacturers serving the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space and a drop-off in demand for transportation services as well as travel and tourism-related services. In the U.S., as people avoid large public gatherings and events, leisure and hospitality, live entertainment and retail sectors are likely to be impacted.

While the economic impact of the virus remains unknown, the February jobs report offers insight into the underlying strength of the labor market before impacts from the virus begin to be reflected in the economic data related to national and Philadelphia commercial real estate listings. This may suggest the economy’s resilience amid continued uncertainty. – By Christine Cooper, Managing Director and Senior Economist for CoStar Market Analytics, Los Angeles.

For more information about Philly office space, Philly retail space, and Philly industrial space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly office space, Philly retail space and Philly industrial space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly office space, Philly retail space or Philly industrial space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly office space, Philly retail space or Philly industrial space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Grocers, Gyms, Discount Apparel Keeping Philly Retail Space Market Afloat

Store closures reached a record-high nationally in 2019, and the Philadelphia commercial real estate market was not spared from the fallout.

Sears and Kmart alone shuttered eight stores in the Philly retail space market, resulting in 1 million square feet of new retail vacancy. Market-wide net absorption, the difference between move-ins and move-outs, ended the year slightly in the red.

This CoStar Realty Information Inc. report involving Philadelphia commercial properties is being made available through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

The latest Philadelphia retail market video update from Adrian Ponsen at CoStar Analytics examines these trends in more detail to help investors understand the challenging and fast changing retail market they face in 2020. Please click here to view the video.

Market trends in the Philly retail space market, however, would have been far worse if not for the range of tenants that faced less pressure from Amazon and continued to expand.

More than 12 new grocery store locations opened in the Philadelphia area last year, along with several new fitness centers. In addition, discount clothing retailers, such as Burlington, Marshalls, TJ Maxx and Old Navy, also continue to grow their store counts in the Philly retail space market. Despite competition from online clothing sellers, many budget-conscious shoppers still find that it’s simply quicker and more cost effective to visit brick-and-mortar locations and try clothes on, rather than ordering online and risk having to make returns.

For more information about Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly retail space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly retail space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly retail space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Retail Pop-Ups Evolve as Landlords Seek Fresh Appeal

The bright neon sign declares “You are magic!” as a room fills with a rainbow of lights activated by a couple, Jaime Martinez and Cristina Cave, clasping hands while touching sensors.

The two wriggle their bodies and twist their arms up, activating more lights, all while a camera behind them discreetly snaps photos of their colorful dance. Within minutes, the camera creates an Instagram-ready graphic that is emailed to their inbox for social media sharing.

Cave and Martinez are among hundreds of people who visited Color Factory, an interactive pop-up art exhibit in a former 20,000-square-foot furniture store in Houston on a recent winter afternoon. Families, couples, and children crowded the sold-out exhibit that day, jumping into the NASA-themed plastic ball pit, drawing on walls with three-foot long blue pens, munching on macarons and mochi ice cream, and sniffing works of art that have been infused with scents of freshly cut grass and butter popcorn.

Color Factory represents an increasingly important new breed of retail tenant that could provide one answer to the struggle retail property owners in national and Philadelphia commercial real estate markets have as they search for ways to lure in customers as online shopping grows. So-called pop-up shops, defined because they have temporary leases, have been around for years mostly as seasonal retail strategies around Halloween or Christmas.

This excerpt from a CoStar Realty Information Inc. report by Marissa Luck involving U.S. and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

This new wave of pop-up stores in the U.S. commercial real estate market – including Philly retail space – is a radical departure from the traditional seasonal model, and they are breaking into hybrids, according to a recent report. Many of the concepts like Color Factory don’t even bank on selling visitors goods and instead rely on admission costs and social media attention for their bottom line.

Pop-up retail is estimated to be a $50-billion-and-growing industry in the U.S. commercial real estate market – including Philly retail space – and, according to industry sources, the number of pop-ups in New York City doubled in 2019 and is now right around 200.

The pace of the pop-up boom among national and Philadelphia commercial real estate properties is expected to continue in 2020. Experts expect pop-up leases to further entrench themselves in major metropolitan cities and expand out across the country into more medium-sized cities. Though temporary in nature, the pop-up lease could become a permanent piece of commercial real estate, though the form is changing.

The rise in pop-ups is a response to the retail apocalypse as a record number of storefronts close amid changing consumer habits and the rise of online shopping, leaving millions of square feet of retail space vacant across the country. While pop-ups aren’t expected to be the solution to the rising tide of retail vacancies, they do represent an increasingly innovative way for landlords to generate income and create foot traffic at a property. – By Marissa Luck, CoStar Realty Information Inc.

For more information about Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a Philadelphia commercial real estate broker that specializes in Philly retail space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

A Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, Wolf Commercial Real Estate provides unparalleled expertise in matching companies and individuals seeking new Philly retail space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly retail space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Commercial Real Estate Tax Deduction Restrictions

commercial real estate tax deduction restrictions.It’s 2020! Let’s take a quick look at some recent tax law changes affecting commercial real estate tax deduction restrictions. Below please find some insight into recent tax changes affecting commercial real estate tax deductions.

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Here are some items that come to mind:

(1) The Tax Cuts and Jobs Act enables investment real estate owners to still defer capital gains taxes using section 1031 like-kind exchanges. There were no new restrictions on 1031 exchanges of real property made in the law. However, the new law repeals 1031 exchanges for all other types of property that are not real property. This means like-kind exchanges of personal property will no longer be allowed after 2017 for collectibles, franchise rights, heavy equipment and machinery, collectibles, rental vehicles, trucks, etc. The rules apply to real property not generally held for resale (such as lots held by a developer).

(2) The capital gain tax rates stayed the same so a real estate owner selling an investment property can potentially owe up to four different taxes: (1) Deprecation recapture at 25% (2) federal capital gain taxed at either 20% or 15% depending on taxable income (3) 3.8% net investment income tax (“NIIT”) when applicable and (4) the applicable state and local tax rate.

(3) The tax law creates a new tax deduction of 20% for pass-through businesses. This gets tricky but here goes. For tax years 2018-2025, an individual generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. The 20% deduction is not allowed in computing Adjusted Gross Income (AGI), but is allowed as a deduction reducing taxable income. 

Restrictions on Tax Deductions

(1) Mostly, the deduction cannot exceed 50% of your share of the W-2 wages paid by the business. The limitation
can be computed as 25% of your share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis
(the original purchase price) of property used in the production of income.

(2) The W-2 limitations do not apply if you earn less than $157,500 (if single; $315,000 if married filing jointly).

(3) Certain personal service businesses are not eligible for the deduction, unless their taxable income is less than
$157,500 for singles and $315,000 if married. A “specified service trade or business” means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. (It appears President Trump liked real estate people but did not like professionals like lawyers, doctors, accountants and other consultants).

(4) The exception to the W-2 limit and the general disallowance of the deduction to personal service businesses is phased out over a range of $50,000 of income for single taxpayers and $100,000 for married taxpayers filing
jointly. By the time income for a single taxpayer reaches $207,500 or $415,000 for a married-filing-jointly
taxpayer, the W-2 limitation will apply in full (i.e. personal service professionals get no deduction).

(5) The new tax law increased the maximum amount a taxpayer may expense under Section. 179 to $1,000,000 and increased the phaseout threshold to $2,500,000. Interestingly, the new law also expanded the definition of Section. 179 properties to include certain depreciable tangible personal property used predominantly to furnish lodging. It also expanded the definition of qualified real property eligible for Section 179 expensing to include the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems

(6) State and local taxes paid regarding carrying on a trade or business, or in an activity related to the production of income, continue to remain deductible. A rental property owner can deduct property taxes associated with a business asset, such as any rental properties. Don’t confuse such with the itemized deduction for your personal residence or vacation home which is now limited.

(7) While the prior law generally allows a deduction for business interest expenses, the new tax act limits that deduction to the business interest income plus 30% of adjusted taxable income. However, taxpayers (other than tax shelters) with average annual gross receipts for the prior three years of $25 million or less are exempt from this limitation. Real estate businesses can elect out of the business interest deduction limitation, but at the cost of longer depreciation recovery periods—30 years for residential real property and 40 years for nonresidential real property. If a real estate business does not elect out of the interest deduction limitation, then residential and nonresidential real property depreciation recovery periods are maintained at 27.5 years and 39 years, respectively.

Phew-there you have taste of what we’re going or at least as we see general changes directly or even indirectly
affecting real estate peeps. As you can see, the new law will bring a lot of changes (both good and bad) to individual and business taxpayers. On the plus side, this means more planning opportunities for many although looking for answers can be problematic as we all try to navigate through uncertain territory. These comments only touch the surface of one of the biggest tax overhauls in the nation’s history. Stay tuned and do stay close to your tax attorney and accountant.….

 

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New Census Figures Show Rise in College Educated Renters in Philly

Just before the start of 2020, the U.S. Census Bureau released a treasure trove of its most recent demographic data from 2018.

While the census’ data releases are slightly dated, the bureau still provides far and away the most granular insights available on changes in long-term demographic trends that offer a view of the national and Philadelphia commercial real estate markets.

For the U.S. commercial real estate market – including Philly retail space – one of the most important takeaways from the recent release was the continued surge in Philadelphia’s population of college-educated renters.

This CoStar Realty Information Inc. report involving U.S. and Philadelphia commercial properties is being made available through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

The year-end tally of overall renter households in Philadelphia County wasn’t particularly noteworthy. At 287,500, the figure was almost unchanged compared to 2013 levels. (See Chart “New Households Moving into Philadelphia County”)

But the slow-growing headline masks dramatic changes in the demographic makeup of Philadelphia’s renter population. With rents having risen for 10 years straight, low income renters are being priced out of Philadelphia at an alarming rate.

The number of renter households without a college degree declined by almost 20,000, or 13 percent over the past five years, more than 10 times the national rate of decline in this cohort. Conversely, the number of renter households with bachelor’s or graduate degrees jumped to 97,000 in 2018, an acceleration over the 5.4 percent annual growth the figure has averaged during the past five years. (See Chart “Renter Households With Bachelors Degrees or Higher”)

In line with these shifts, Philadelphia’s share of renter households earning over $75,000 has now doubled from 10 percent in 2010 to 21 percent in 2018, with most of the gains accruing during the second half of the decade. (See Chart “Percentage of Renter Households Earning $75K+”)

Why is Philly experiencing such rapid growth in high income renters? Increasing affordability barriers to homeownership (which will be covered in a future Costar Research update) are keeping more high-income residents living near U.S. and Philadelphia commercial real estate listings in the renter pool well into their 30s.

However, even greater affordability challenges in nearby New York and Washington, D.C., are sending residents to be closer to national and Philadelphia commercial real estate properties. As housing costs have skyrocketed in those locations during recent years, the number of college-educated migrants arriving in Philadelphia annually has grown by more than 50 percent since 2012.

This influx has been offset by Philadelphia’s continued losses in low- and middle-income renters. Census data suggests that in many cases, these renters are moving to some of the lowest-cost corners of the Philadelphia metropolitan statistical area, including Delaware County, Pennsylvania, and New Castle County, Delaware, which both saw their tallies of non-college educated renters rise by more than 4,000 over the past five years. However, others continue to leave national and Philadelphia commercial real estate properties seeking the mix of lower housing costs and better blue-collar employment prospects offered in the southern U.S. (See Chart “Total Renter Households”)

The overarching takeaway from the 2018 census release is that while Philadelphia’s renter population is growing more slowly than it was five years ago, it continues to gentrify at a rapid pace – By Adrian Ponsen, CoStar Realty Information Inc.

For more information about Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly retail space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly retail space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly retail space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

 

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Job Growth, Consumer Spending Bode Well for CRE in 2020

The longest economic expansion since World War II in the national and Philadelphia commercial real estate markets shows indications of staying solid in 2020, extending the record bull run for U.S. commercial real estate despite some risks that could eventually move the country toward a recession, according to CoStar economists.

Trade wars and a slowdown in the U.S. manufacturing sector as well as around the globe last year roiled equity markets and rattled businesses in the U.S. commercial real estate market – including Philly retail space, CoStar economists say in the “2019 Year in Review of the U.S. Economy” video (available by clicking here). This robust job growth has, the CoStar experts said, extended the spending power of American consumers, the heart of the nation’s economic engine.

This CoStar Realty Information Inc. report involving U.S. and Philadelphia commercial properties is being made available through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

“Our growing economy still bodes well for demand for commercial and multifamily real estate,” said Christine Cooper, managing director and senior economist from CoStar’s Los Angeles office. “Expanding payrolls will continue to fuel demand for office space, while rising incomes and consumption will boost demand in industrial and retail sectors. As job growth continues, consumers appear quite optimistic and unconcerned by the trade war and any economic slowdown abroad.”

Trade tensions caused markets dominated by U.S. and Philadelphia commercial real estate listings to swoon, resulting in distress and uncertainty for businesses dealing with disruptions to their supply chains and higher costs. That made firms cautious in their plans for expansion and private business investment, which has been slowing since mid-2018, said Galina Alexeenko, managing director and senior economist from CoStar’s Atlanta office.

“The business sector’s mood soured in 2019 as uncertainty reigned, costs rose, profit margins compressed and earnings growth slowed,” Alexeenko said. “Falling exports and the pullback in business investment have been a drag on economic growth.”

Migration of workers from the Northeast and Midwest – as well as throughout national and Philadelphia commercial real estate properties as well – continued to bolster surprising strength in labor markets, with job growth fueling real estate demand in the South and U.S. West, said Alexeenko. The Federal Reserve Bank faced rising trade uncertainties, slowing inflation and a global economic slowdown, the analysts said in the video.

“Going forward into this new decade, we expect economic growth to slow somewhat as the labor market cools, consumer spending loses some momentum and persistent global and trade policy headwinds weigh on business sentiment and investment,” Cooper said. – By Randy L. Drummer, CoStar Realty Information Inc.

For more information about Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly retail space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly retail space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly retail space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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2019 U.S. Office Investment, Leasing Shatters Records

Demand for U.S. offices throughout national and Philadelphia commercial real estate markets set a post-recession record in 2019 as companies and real estate investors set aside concerns about a slowing global economy and snapped up workspace.

The average U.S. office vacancy rate matched a post-recession low of 9.7 percent and office sales and leasing set new records in 2019 in the U.S. commercial real estate market – including Philly retail space, CoStar economists say in the “2019 Year in Review of the U.S. Office Market” video (available by clicking here). This should result, they say, in strong demand and performance through at least the middle of this year as technology companies like retailer Amazon and iPhone maker Apple move into new offices.

This CoStar Realty Information Inc. report involving U.S. and Philadelphia commercial properties is being made available through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

Led by about 8 million square feet taken by shared-office provider WeWork, total signed leases among U.S. and Philadelphia commercial real estate listings increased to a record 360 million square feet in 2019, and the total could rise by another 100 million square feet as CoStar researchers wrap up data collection for the year, said John Affleck, CoStar’s vice president of market analytics. WeWork is expected to scale back in 2020 after it scrapped an initial public offering and replaced its CEO in 2019.

About 160 million square feet of office space is under construction, roughly 2 percent of the nation’s total office supply, with Austin, Texas; Nashville, Tennessee; and San Jose in California logging the most building activity. Expanding tech firms such as Salesforce and Pinterest have snapped up space for future growth, signing leases for national and Philadelphia commercial real estate properties even before buildings receive development approval, said Mike Roessle, director of U.S. office analytics for CoStar Group.

“It’s surprising that large tenants are finding available space in such a low-vacancy rate environment,” Roessle added.

While average rent growth decreased in 2019, it ended the year at an average 1.8 percent. CoStar expects those trends to continue in 2020, forecasting 1 percent average annual rent growth from this year through 2024, Roessle said.

Despite rising concern about the possibility of a global recession, investors shelled out more than $130 billion to buy buildings last year, a figure that could approach $150 billion as CoStar’s researchers finish collecting deal information. That would be the highest total since 2007, the peak of the previous real estate boom.

Office investment in New York City was down significantly while sales in Seattle, San Francisco and other tech-focused markets increased last year, Affleck said. – By Randy L. Drummer, CoStar Realty Information Inc.

For more information about Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly retail space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly retail space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly retail space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Sale and Leaseback of Commercial Real Estate

Sale and Leaseback of Commercial Real EstateLet’s explore the sale and leaseback of commercial real estate. Confer with the professionals at WCRE or ask us for a seasoned real estate or tax attorney but here’s one technique Abo has seen work well with business clients. Although real estate is generally thought of as an illiquid asset, some liquidity can be achieved by taking out a loan backed by the property. Alternatively, a sale and leaseback may be used effectively if a company’s balance sheet is burdened with excessive debt or just having difficulty in obtaining new capital. Typically, the transaction involves the company owned property being sold to a third party and then leased back to the company under a long-term lease.

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Sale and leaseback transactions may be on the rise but clients need to be aware that the IRS often focuses on transactions between closely-held corporations and their controlling shareholder to make sure that these transactions benefit the company as well as the shareholder. In one common type of sale and leaseback transaction, the company sells the land with a building on it to the shareholder and, in turn, the shareholder leases it back to the company. Some of the financial and tax benefits we’ve seen have included:

The rental deductions the company could take might be significantly larger than the former depreciation deductions if the property had been in service for many years.

After the sale and the leaseback transaction, the shareholder’s basis in the property will be its fair market value which is usually greater than the price paid for the property by the corporation. Thus, the shareholder’s depreciation deduction would be much greater than what was previously available to the corporation (also still need to consider the tax consequences of the sale to the corporation).

The sale and leaseback may enable the shareholder to generate passive rental income that could be offset
against passive losses of the shareholder.

The IRS would obviously be concerned that these transactions have economic substance and that they are
based on reasonable market conditions, and not just designed to generate larger tax deductions. Thus, for
a sale to be valid, the controlling shareholder should have taken an equity interest in the property and also
assumed the risk of loss. For the leaseback to be valid, four tests come to mind that really should be met:

1. The useful life of the property should exceed the term of the lease.

2. Repurchase of the property by the corporation at the end of the lease term should be at fair market value and not at a discount.

3. If the leaseback allows for renewal, the rate should be at a fair rental value (speak to WCRE, not necessarily the accountant).

4. The shareholder should have a reasonable expectation that he or she will generate a profit from the sale and leaseback transaction based on the value of the property when it is eventually sold and the rental obtained during the lease term.

I suspect one of the biggest risks for the seller-lessee is the loss of a valuable asset that could have substantially appreciated over its useful life. Also, the rental market could drop, leaving the seller locked into a rental rate in excess of fair value. On the other side of the table, the seller could move or default, leaving the buyer with unattractive real estate in a soft market.

Even if there are no other problems, the benefits of the deal could be substantially reduced if the IRS deems that it is merely a “financial lease.” In that case, the IRS will treat the seller-lessee as the true owner of the real estate, with all the appropriate tax assessed, and the buyer-lessor will be treated as a lender-mortgagee.

Since sale and leaseback transactions can be quite complicated and also have to pass IRS muster, as I stated earlier, whether you are a buyer, seller or investor, you are well advised to consult with WCRE and seasoned real estate/tax counsel about your financial and tax consequences and the manner of structuring and implementing them to withstand possible IRS challenge.

FOR MORE INFORMATION:
Martin H. Abo, CPA/ABV/CVA/CFF is a principle of Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. With offices in Mount Laurel, NJ and Morrisville, PA, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com.

 

Martin H. Abo, CPA/ABV/CVA/CFF
307 Fellowship Road, Suite 202
Mt. Laurel, NJ 08054
(856) 222-4723
marty@aboandcompany.com
For more information, contact:

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Mixed Messages Cloud the View Toward Clarity in Economic Policy

Analysts had hoped to get some clarity in the past week on both monetary policy and fiscal policy fronts. Instead, with all the recent announcements, reversals, and delays related to trade deals, there were many moving parts with which to contend.

On the monetary policy side, the Fed formalized its intent to keep interest rates in the U.S. economy – along with national and Philadelphia commercial real estate markets – steady for the foreseeable future. This was largely expected, though some comments by Federal Reserve Chairman Jerome Powell suggested an interesting shift in the committee’s mindset over the previous year.

In his most recent press conference, Powell said “even though we’re at 3.5 percent unemployment, there’s actually more slack out there.” And then later, “I like to say the labor market is strong. I don’t really want to say that it’s tight.”

This CoStar Realty Information Inc. report from Robert Calhoun and Matt Powers involving economic issues as they relate to U.S. and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

The suggestion by a Fed chairman that 3.5 percent unemployment affecting, among other segments of the economy, the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – doesn’t represent maximum employment would have seemed crazy even just three or four years ago and would have been met with incredulity.

We know that to be true because in June of 2016, then-Fed Governor Jerome Powell said, “The unemployment rate has fallen from 10 percent to 5 percent, close to the level that many observers associate with full employment.”

We should congratulate the Fed for being humble about its ability to estimate something unobservable like full employment. You can’t see full employment, but you will know it by its fruits. Those fruits are rising wages and rising inflation.

November’s consumer price index showed little risk of an undue rise in inflation any time soon. While the monthly increase in the core consumer price index (excluding food and energy) was double that of October, the year-over-year increase remained at 2.3.

The Fed bases its inflation target on a measure known as personal consumption expenditure, which tends to run lower than the index due to differing weights. As the core index was most recently 73 basis points above core expenditure, this week’s inflation data suggests that the Fed should continue struggling to meet its inflation target and its resultant effects on U.S. and Philadelphia commercial real estate listings.

As for future wage growth, that depends on continued hiring. Earlier in the week, we got more information on the health of the labor market in the form of the National Federation of Independent Business’s survey. Widespread small business sentiment – as well as the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – appears to have rebounded from uncertainty-driven declines over the last few months.

Plans to increase both capital spending and hiring rebounded strongly, reversing declines that were looking worrisome. The reason for the improvement appears to be better November sales, with more firms reporting an increase in sales than a decline.

Firms were already seeing improvements even before this week’s improved clarity on the outlook. The survey questions about labor tightness and wage growth involving national and Philadelphia commercial real estate properties showed meaningful upticks as well. Given such low recent levels in sentiment across the board, we have been expecting a slowing in growth. While this is still likely, as seen in Friday’s weaker retail sales figure, the most recent small business report says maybe we’ve found a floor.

Last week also provided needed clarity from the fiscal side after weeks of conflicting reports. On Tuesday, the Democrats and Republicans came to an agreement on revamped language for a U.S.-Mexico-Canada trade deal. On Thursday, the U.S. and China reportedly finally agreed to terms on “Phase One” of their trade deal, two months after it was initially reported to be agreed on.

Later is better than never, with the deal reported to call off the planned Dec. 15 tariffs and cut the Sept. 1 tariffs in half. While some details are still lacking and there is no guarantee of further progress, the worst case has been averted. Much like with the Fed, there appears a reduced chance of this issue forcing the U.S. into recession and influencing national and Philadelphia commercial real estate listings. construction. (Robert Calhoun is a managing director and senior economist and Matt Powers is associate director of market analytics for CoStar Market Analytics in New York City.)

For more information about Philly office space, Philly retail space, and Philly industrial space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a Philadelphia commercial real estate broker that specializes in Philly office space, Philly retail space and Philly industrial space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

A Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, Wolf Commercial Real Estate provides unparalleled expertise in matching companies and individuals seeking new Philly office space, Philly retail space or Philly industrial space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly office space, Philly retail space or Philly industrial space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Are Retailers’ Earnings Reports Telling Us Something?

 “After seven consecutive quarters of comparable sales growth, we experienced a deceleration in our third-quarter sales,” – Macy’s CEO Jeff Gennette in a statement accompanying the retailer’s most recent earning release.

Retail has been the big story these past few weeks as many publicly traded companies reported earnings for the third quarter. The tone was … not positive.

Macy’s stock fell 11 percent during the week after reporting the first decline in sales in nearly two years. Home Depot dropped 8 percent after a sales miss. Kohl’s fell by 19 percent, missing significantly while also lowering its outlook. Urban Outfitters fell by 19 percent. Nordstrom fell 10 percent. Only the Target and the TJX Companies – owner of discounters TJ Maxx, Marshalls and HomeGoods – saw their shares rise after each reported a strong quarter.

It is well established by now that the U.S. economy – along with national and Philadelphia commercial real estate markets – are heavily dependent on the consumer, so how worried should we be about the red flags waving in these retail earnings reports? Is this what a strong consumer looks like? The story feels like it is about more than just shoppers shifting to online spending.

This CoStar Realty Information Inc. report from Robert Calhoun and Matt Powers involving U.S. and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

Consumer spending in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – is ultimately built on the foundation of a strong labor market. While we continue to see job growth and low unemployment nationwide, cracks could be starting to show. We have seen job openings decline in recent weeks, and now it seems employers could also be actively laying off more workers. Weekly claims for unemployment insurance rose to 226,000 last week. While still very low from a historical standpoint, claims are up 15,000 in just two weeks.

Weakness in employment appears to be regional, focused largely on the Midwest and some scattered Northeast and Western states. However, the South remains the healthiest region. Every single state in what the U.S. Census Bureau defines as the South – except Maryland and Oklahoma – continues to see jobless claims fall. The economy in Oklahoma is much more heavily dependent on oil than other states (8 percent of employment versus only about 0.5 percent nationwide), so it has seen jobless claims rise as oil prices have declined from 2018 highs. And Maryland really isn’t even in the South, right?

This regional divergence in jobless claims seems largely driven by prolonged weakness in the manufacturing sector, on which Great Lake states are reliant. Manufacturing accounts for roughly 17 percent of that region’s gross domestic product compared to 11 percent in the U.S., including U.S. and Philadelphia commercial real estate listings.

It has been noted earlier that increased uncertainty causes a decline in business activity in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – as well as a decrease in hiring. It also typically signals a slowdown in firing, as decision-makers wait to see how events such as the trade war situation play out. Is this dynamic beginning to change in a worrisome way?

That is hard to say, but if it was, you would see it first in the areas of the country that are most at risk from the trade war, and it appears as if that could be happening.

Fortunately for the economy, the consumer isn’t the only game in town. Housing continues to buck the otherwise weakening trend in most areas of the U.S. economy, with more strong data out this past week, especially involving national and Philadelphia commercial real estate properties.

The National Association of Home Builders’ Housing Market Index posted one of its best figures since the last recession in its November report. The portions of the survey that asks homebuilders their thoughts on current sales, sales over the coming six months, and foot traffic of prospective buyers all have substantially improved in 2019.

Housing starts and permits also reported a leap in the Census Bureau’s October report. By “back-of-the-envelope” math, the rise in homebuilder sentiment and issuance pace of new permits is roughly equivalent to nearly a 1 percent boost to real GDP growth among national and Philadelphia commercial real estate listings. With no trade deal signed yet and wavering hiring indicators, that 1 percent becomes essential.

Meaningful regional divergence also can be seen in homebuilding activity: The Midwest is seeing declines in new building permits while the South leads the way on new construction. (Robert Calhoun is a managing director and senior economist and Matt Powers is associate director of market analytics for CoStar Market Analytics in New York City.)

For more information about Philly office space, Philly retail space, and Philly industrial space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a Philadelphia commercial real estate broker that specializes in Philly office space, Philly retail space and Philly industrial space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

A Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, Wolf Commercial Real Estate provides unparalleled expertise in matching companies and individuals seeking new Philly office space, Philly retail space or Philly industrial space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly office space, Philly retail space or Philly industrial space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need – a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Landlord Issues from Tenant Bankruptcies

Landlord Issues for Tenant BankruptciesTenant bankruptcies are creating headaches for landlords. RadioShack. Brookstone. Toys R’ Us. Sears. With fifteen major retail bankruptcies filed last year in 2018, the toppled retail behemoth has almost become a cliché, and brands once courted by commercial landlords have become major sources of risk. With no sign of a slow-down, this article provides a refresher on your rights, as a commercial landlord, in commercial tenant bankruptcies.

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Commercial Tenant Bankruptcies 101: THE BASICS

• Ipso facto clauses in a lease, which trigger default or acceleration upon the filing of a bankruptcy case, are generally unenforceable under the Bankruptcy Code. Thus, you cannot terminate a lease or stop performing your obligations under the lease on account of the bankruptcy filing.

• The filing of a bankruptcy case triggers the automatic stay, which requires all actions to enforce the lease, evict the tenant or collect a debt (including unpaid rent) to cease. Unless you have a judgment to possess the subject premises, or the lease has otherwise expired by its terms, you must not continue to pursue collection or enforcement activities.

• A commercial debtor may assume a lease and assign it to a third party, in most circumstances without your consent, even if the lease requires the consent of the landlord to assignment.

• A commercial debtor may reject a lease based on its business judgment, and you have very few (virtually no) grounds on which to object to a lease rejection.

Commercial Tenant Bankruptcies 201: WHEN WILL I GET PAID AND HOW MUCH?

The Bankruptcy Code requires bankrupt tenants to continue paying rent under the lease during the pendency of the case (post-petition rent). If a debtor does not assume a lease within 210 days of the commencement of the bankruptcy case, the lease is deemed rejected.

Depending on whether the lease is assumed or rejected and the financial health of the bankruptcy estate, rent that was unpaid as of the date of the filing (pre-petition rent) may be paid in full, in part or not at all. Tenants under assumed leases must cure all breaches under the lease, including to pay in full all unpaid pre-petition and post-petition rent and any damages incurred as a result of the breach of the lease. The cure amounts must be paid at the time the lease is assumed by the debtor or its assignee.

Landlords under rejected leases, on the other hand, are entitled to a claim against the bankruptcy estate, which, depending on the financial health of the debtor, may be paid in full, in part or not at all. While unpaid postpetition rent constitutes an administrative (or dollar-for-dollar) claim against the estate, all other pre petition rent and damages caused by the rejection of the lease constitute unsecured (often, cents-on-the-dollar) claims, and will be paid pro rata with other unsecured creditors. Further, while rejection damages include the amount of rent remaining in the life of its lease, damages are statutorily capped at the greater of one year of rent or the rent for 15% of the remaining term of the lease, not to exceed three (3) years. Landlords who successfully mitigate their damages and re-let the premises may not be entitled to any claim if the rent received under the new lease is greater than or equal to the rent under the existing lease. Payments on unsecured claims are typically paid, if at all, after the debtor has confirmed a plan of reorganization.

Commercial Tenant Bankruptcies 301: DO I HAVE TO ACCEPT A RENT REDUCTION?

Bankruptcy affords the debtor tenant a unique opportunity to re-negotiate its leases. On one hand, the Bankruptcy Code prohibits the debtor from cherry picking which provisions of a lease it wants to assume and which provisions it would like to reject; instead, the Code requires the debtor to assume or reject the lease in its entirety. On the other hand, many debtor tenants leverage the specter of potential rejection to obtain significant rent concessions from landlords. Rent reduction negotiations often begin in the pre-bankruptcy period and continue in the early days of the case, with landlords being told that failure to negotiate will result in certain rejection.

You do not have to negotiate with the debtor tenant or accept a rent reduction, though doing so may increase the possibility of the assumption of your lease. Debtor tenants are more likely to reject leases:

• Not essential to the continued operation of the business,
• With above-market rent,
• In areas saturated with other debtor locations, or
• With low-performing stores.

If your lease falls outside of these categories, then the debtor may assume the lease even without obtaining a rent (or other) concession.

Commercial Tenant Bankruptcies THE BIG PICTURE

As soon as a tenant shows signs of financial weakness, consider actively pursuing remedies under the lease, including termination or eviction proceedings. If the lease has expired or you have already obtained a judgment for possession when your tenant has filed for bankruptcy, tear up this article! (after confirming with your attorney that the lease is, in fact, properly terminated).

If the lease has not expired or terminated at the time of filing, be sure to engage bankruptcy counsel to review the proceedings and protect your interests in the case. Bankruptcy counsel will object to any insufficient cure amount, file a proof of claim for your damages and review any plan of reorganization to advise you of your
anticipated recoveries. Even though retail bankruptcies have become commonplace, sound counsel will ensure
that your rights are protected and help you get paid.

Finally, engage competent real estate professionals, who can provide an accurate assessment of current market
rent and assist in finding a replacement tenant to satisfy and requirement that you mitigate your damages
after rejection/termination of the lease.

The contents of this article are for informational purposes only and none of these materials is offered, nor should be construed, as legal advice or a legal opinion based on any specific facts or circumstances.

 

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